Rosalind Evans
Here’s a guide to understanding if you’re excelling in your retirement-saving efforts.
Calculating the exact retirement savings one needs can be a daunting task. Some adopt straightforward methods like saving a fixed percentage of their earnings, say 10% or 15%, while others rely on incentives such as employer matching.
The key question to address is: Are you putting aside enough to sustain the lifestyle you envision in your retirement years? Charlie Bolognino, a financial planning expert from Side-by-Side Financial Planning in Plymouth, Minnesota, suggests considering your annual expenses in retirement. Think about everyday costs, yearly health care expenses, and recurring big-ticket expenditures, like replacing a vehicle.
To gauge if you’re on a promising retirement savings trajectory, consider the following pointers:
Assessing the Typical 401(k) Balance By Age
Vanguard’s 2020 data indicates that the standard 401(k) savings rate stood at 7% of an individual’s income. The mean 401(k) account balance was reported as $129,157. As people grow older, their savings and accumulations generally see significant growth.
Patrick King of Prana Wealth in Atlanta explains that saving requirements can differ considerably. While one person might dream of a luxurious retirement, others might aim for a simpler, quieter golden age. If you’re unsure about your ideal savings rate, a starting point could be to set aside 10% of your earnings.
For perspective, here are the 401(k) averages broken down by age groups (as per Vanguard 401(k) data, 2020):
– Under 25 years: Balance – $6,718, Savings rate – 5%
– Age 25-34: Balance – $33,272, Savings rate – 6.3%
– Age 35-44: Balance – $86,582, Savings rate – 6.7%
– Age 45-54: Balance – $161,079, Savings rate – 7.4%
– Age 55-64: Balance – $232,379, Savings rate – 8.7%
– 65 and older: Balance – $255,151, Savings rate – 9.2%
Set a Goal to Fully Fund Your 401(k)
It’s admirable to aim to maximize your 401(k) contributions. The 2022 contribution cap was $20,500. Those 50 years and above could contribute an extra $6,500, making it a total of $27,000 in 2022. This not only ensures a secure retirement but also optimizes your tax benefits, as traditional 401(k) contributions are tax-deferred until withdrawal.
Yet, only 12% fully utilized their 401(k) allowance in 2020, as per Vanguard’s study. Typically, those who did had salaries over $150,000 annually and were nearing retirement.
Predictably, a higher salary facilitates retirement savings. For instance, individuals earning upwards of $150,000 had an average 401(k) balance of $354,569, a stark contrast to the $121,570 average for those earning between $75,000 to $99,999, as per Vanguard.
Kayse Kress from Physician Wealth Services in San Diego suggests a gradual approach. “Start with a manageable contribution and increase it by 1%-2% yearly till you hit the cap. Also, ensure you’re leveraging employer match opportunities.”
Aim for the Million-Dollar Mark in 401(k) Savings
Since there are annual limits to 401(k) contributions, amassing a significant amount requires consistent saving and wise investing over many years. For instance, those who consistently saved for over 15 years had an average 401(k) balance of $505,353 in 2021 – significantly higher than the overall average of $126,083, according to a Fidelity study.
However, frequently changing jobs can fragment your retirement savings, resulting in smaller account balances. Career breaks, delays in joining new retirement plans, and other factors can also impact savings.
Don’t Forget About Catch-Up Contributions
If you’re 50 or above, you can contribute an extra $6,500 to your 401(k) in 2022. Yet, a T. Rowe Price study revealed that only 14.3% eligible for these took advantage of them in 2020.
It’s common for older 401(k) contributors to ramp up their savings as retirement nears. Jared Paul, a financial expert from Capable Wealth in Albany, New York, advises, “Establish your own saving increments. Ideally, increase your savings when you earn a raise or get promoted. With an income spike, you naturally have a surplus to set aside.”
In the journey toward retirement, it’s essential to periodically evaluate and adjust your savings strategies. By understanding the benchmarks, leveraging opportunities like employer matches, and taking advantage of catch-up contributions, you can position yourself for a comfortable and fulfilling retirement. No matter where you currently stand, remember that every step you take today will pave the way for a brighter, more secure tomorrow.
