5/24/2011 12:55 PM ET|
How big does your 401k need to be?
It depends on (among other things) the kind of lifestyle you hope to have in retirement. Here are 5 factors to consider in setting a 401k savings goal.
For many Americans, a 401k plan is their primary vehicle for accumulating assets for retirement. But is that enough?
For 2011, the maximum annual 401k contribution is $16,500, not including employer-matched contributions. If you are at least 50 years old, you can contribute an additional $5,500. Your plan may impose lower limits, so check with your plan administrator.
If you're older than 40 and haven't started saving for retirement, even these relatively large annual contributions may not be enough to reach your retirement goals. Here are five questions to help you decide whether your 401k plan will be sufficient to fund your retirement needs:
1. What kind of lifestyle do you want in retirement? You'll find rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. How much you will actually need depends upon your individual circumstances.
For example, if your mortgage will be paid off and you plan to stay close to home mostly, 70% of your pre-retirement income may be sufficient. But if you plan to travel extensively, you may need 100% or more of your pre-retirement income. Also, the amount needed may change over the course of your retirement.
2. How much can you expect from Social Security? Social Security benefits were never designed to be the sole source of retirement income, but they still are a valuable source of income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes. For 2011, the maximum Social Security benefit for a worker retiring at age 66 is $2,366 per month.
3. How much does your employer contribute to your 401k plan? The $16,500 maximum contribution to your 401k plan does not include employer contributions. Employer-matched contributions vary by plan, but a typical match is 50 cents for every dollar contributed, up to a maximum of 6% of your pay.
Over the past several years, many employers have reduced or eliminated matching contributions. As the economy has emerged from recession, many of these companies have restored the company match to pre-recession levels. If your employer offers a match, make sure you take full advantage of it even if your company's plan is not great. A generous match can contribute substantially to your retirement savings. In addition to a direct match on your 401k contributions, your employer may make contributions to a profit-sharing plan on your behalf.
4. How much are you contributing to your 401k plan? While earning solid returns on your 401k investments is important, studies have shown that the amount contributed is a bigger determinant of your ultimate plan balance. Be sure to contribute as much as you can, and try to increase your contribution percentage each year.
5. What other sources of income can you count on in retirement? If you already have other retirement assets, you might not need to count as heavily on your 401k plan. Other potential sources of retirement income might include a defined-benefit pension plan, individual retirement accounts, an inheritance or your spouse's retirement plan. If you have other investments, it is important to have a strategy that fully uses all of these retirement vehicles, both taxable and tax-deferred.
Providing for a comfortable retirement takes planning. Don't be lulled into thinking your 401k plan alone will be enough. If you haven't put together a financial plan, don't be afraid to enlist the aid of a professional if you need help.
This article was reported by Roger Wohlner for U.S. News & World Report.
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Still, I'm spending less in retirement than expected, so I began keeping a detailed budget this year, breaking discretionary spending into categories like groceries, clothes, restaurants, entertainment, hobbies, etc.
Excellent point! Nowhere does it explain how to figure out how much you need to save even if you know how much you need.
You can get an approximation from some online retirement calculators from T Rowe Price, Vanguard, Fidelity, etc.
If your math skills are good enough, you can set up an Excel spreadsheet with a row for each year from beginning retirement to, say, age 95 and columns for your sources of income (soc sec, 401k, pension, etc.) and expenses (general, healthcare, etc.) that takes into account CPI, real, and healthcare inflation, percent gain of your securities, percent of your nest egg you'll use each year, etc.
You can play with such a spreadsheet, adding more data, and get an excellent feel for what happens if the stock market drops in half, you need a new car, etc.
instead of all this naysaying, let's start thinking of positive ways to change our country for the better.
you're telling the obvious that I've read in hundreds of articles... you just wasted 3 minutes of my life... your next task: write an article about how paint dries, but warn people that you're about wasting their time.
Do yourself a favor. Put away the maximum you can as soon as you can. Use time as the tool to make your money grow. Remember, these are tax deferred accounts so you are using money that would have been paid in taxes to grow your portfolio. It worked for me and my wife. Thirty years of saving for retirement and one day I was able to walk into my 30 something boss's office and tell him I no longer would be working there. The look on his face was priceless when I told him the reason was because the previous year in interest and dividends I earned 3 times what I was making in salary and there was no reason to continue working.
So instead of asking "how big does my 401k need to be?" put yourself in the position of saying "my 401k is big enough already!"
Yes....Yes it does. And since it depends on so many factors, the rest of the article is either too simplistic or useless.
It would seem those % guide lines are a bit too generic, or perhaps weight more for the average wage. In my case about 25 % of my current wage goes to incomes taxes, about 10 % to real estate taxes (darn abusive if you ask me), about 20 % to mortgage payments, and about 10 % to retirement savings. So leaves about 35 % for my "standard of living" (really, about 10 % of that spending is also taxes on spending, or gov't fees, etc).
At retirement the last two items (30 %) will no longer occur. Income taxes will drop by 30 %. Work related expensed (transportation etc) will go away . I personally think I can get by on about half of what I do now. If expensive travel was a desire, that would be different...but how many people travel extensively when retired...or for long if they do ?
Hanks....take a basic math class, and think for yourself rather than parroting the fear factor.
Pete Hunt, hiding behind the mask is appropriate, and hoping others will cover your societal costs while you hide out is in character...ask folks you know.
401K plans weren't meant to be the sole source of retirement income, either. They were supposed to be a supplement to pension plans, which, of course, are now virtually non-existent.
Ah yes, another 'fantasy land' article from MSN. Recent examples such as articles regarding how long commutes can hurt you (because doing something about it by finding a new job close to home is sooo easy in this job market). How $4/gallon gas prices has benefits such as shorter airport security lines. And now about 401(k) planning. ANYTHING to draw attention away from the economic crisis at hand. Which is about to explode again, it's just a matter of time. Stagflation and 9% unemployment (truly more like 16-%20) can only go on for so long.
Filmore - That makes more sense but I did not get that from your first post. Ok...now you sound less crazy..LOL Thanks for clarifying that.
Nicole of course they take money they get from taxes and social security to pay down other debts but you are totally wrong about the 401k. They don't touch that money for paying debt as that money is not held by the government, its held by private investment business like TD investments, ING, etc.... And the reason they will raise the retirement age is because people are living longer so the amount of money set aside by social security will not last long enough anymore so they need people to work longer to save more. Simple as that...
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