You’ve probably heard you should be saving for your future by investing. But how much should you be investing each paycheck and how much should you have in your 401(k) or IRA?
How much should you contribute to your 401(k)/403(b)?
Some people say you should contribute 15% of your income towards your employer retirement plan. Sometimes I’ll tell people 20%, to have more than enough in retirement.
Where do those numbers come from? They are some general guidelines to follow that factor in you working from age 25 to 65, then retiring and living for another 30 years.
But 15% doesn’t consider any of your goals.
- Do you have consumer debt you should pay off first?
- Do you want to retire early at age 50? Or 40? Or 35?
- Are there alternative investments like real estate that can generate passive income to support your lifestyle?
- Do you have a defined benefit plan?
- If you own a home, do you want to pay down your mortgage faster?
- Would you better off investing in more education or starting a business?
Forget the cookie cutter answer of ‘you should save 15%‘. If you have no goals set for your future and just aren’t sure, then yes – you should save 15%.
If you can’t save 15%, save as much as you can and plan on increasing your savings over time. For more details, see how much should you put in your 401(k)?
401(k), 403(b) and 457 plan contribution limits for 2017
In 2017 you can contribute up to a maximum of $18,000 into your 401(k) if you’re younger than age 50. There is a catch-up provision that allows you to contribute an additional $6,000 more ($24,000 total) if you are age 50 or over.
|Under 50||$18,000 in 2017|
|50 or over||$24,000, including base maximum and $6,000 as an annual “catch up contribution”|
You might think there is no way you can max out your retirement plan at $18,000/year. And that may be true right now. If you’re fresh out of school earning an entry-level salary, it will be tough unless you have a higher paying job.
But if you have a dual-income household or higher paying job it’s possible. The more you can save now the more your money will compound over time and grow.
How much should you have in your 401(k), 403(b), 457 plan by age 30?
According to Fidelity (and several other studies) by age 30 you should have 1x your salary saved for retirement.
If at age 30 you’re making $40,000 gross, you should have $40,000 total in all of your retirement accounts.
The general rule of thumb assumes:
- a retirement age of 67
- a 15% savings rate
- a 1.5% constant real wage growth
- living to through 93
- an income replacement target of 45% of preretirement income (assumes no pension income).
What that means is – there are a lot of assumptions built in!
And those assumptions don’t include if you want to travel the world for an entire year at age 68, or if all you’re planning is to watch the T.V. shows you missed out on. I plan on watching all the Star Trek shows someday for what will probably be the 10th time.
You aren’t like any other investor or saver. You have a different job situation, family situation, housing costs, risk tolerance, debts, and savings rate. Your investments may have better diversification or worse than other investors.
Comparing yourself to your co-worker, neighbor, best friend, or sibling serves no purpose.
How much should you have in your 401(k) at other ages?
Fidelity has come up with some guideposts so you can have a target to aim.
These are just some guideposts though to start a conversation. Your situation will be different. If you’re behind, it’s no reason to get discouraged.
You may have decided starting a family was more important in your 20’s or early 30’s, so you saved a little less.
Maybe you went to graduate school so you could earn more income later.
You may have a lot of school loans to pay off.
But no matter what, you have a choice as to what you are going to do going forward.
Other factors are when you want to retire and what your lifestyle will look like in retirement.
Things that can prevent you from contributing to your 401(k)
Yes, life happens. There are a lot of things that can prevent you from maxing out your retirement accounts:
- You have debts to pay off
- You don’t have access to a 401(k)
- There is more month than money in your life
You’re not alone. According to a recent study two-thirds of American’s aren’t putting money into a 401(k).
How are other people doing?
While Fidelity shows you what you should be saving, Vanguard reports on what is being saved. Here are the average 401(k) balances by age group:
Here are the account balances based on income:
You’ll find you’re either ahead or behind. No matter where you stand, most people are woefully underprepared with retirement savings. The good news is you can choose to change your situation.
What to do if you’re behind in your retirement savings
First, don’t beat yourself up if you’re behind with your savings. Most of us didn’t learn the importance of saving early and saving often. We all start where we start.
They don’t teach personal finance in school.
The HR person doesn’t do a good job of explaining it either.
In my case, I just wanted to spend it and buy cool stuff, thinking I could make it up later.
Before anything else paying down high-interest debt is priority number one. Most debts carry an interest rate that is more than what you can earn investing.
But now that you know you should get started or bump up or your savings – it’s time to get started. Commit to saving one penny of every dollar just to get things going. Consider using an investing app like Acorns that will invest your spare change.
Just do something.
Start automating your savings and build those good habits that will carry you into retirement with peace of mind and security.