How Much Should I Contribute to My 401(k)?

January

How Much Should I Contribute to My 401(k)?

January 16, 2024

For those who wonder, “How much should I contribute to my 401(k)?” you’ve come to the right place.

As much as we’d like to be able to tell you an exact amount to contribute, we can’t.

It varies from one person to another, depending on how much you’ve already saved, how much you need to save, what your employer’s 401(k) plan is like, and your retirement lifestyle hopes and dreams.

That being said, it’s normal to want to know how you compare to others, but it isn’t as simple as asking your co-workers.

How much we contribute to our 401(k)s or have already saved seems to be a taboo topic at dinner parties.

Let’s start with how much is in the average 401(k) account.

According to Vanguard’s How America Saves Report 2023, “In 2022, the average account balance for Vanguard participants was $112,572; the median balance was $27,376. Vanguard participants’ average account balances decreased by 20% since year-end 2021.”¹

The average 401(k) is significantly higher than the median 401(k) balance.

This is because the average includes all the outliers – those who have saved millions against the average Joe.

The median is the middle balance between the highs and lows.

While it’s worthwhile to consider these numbers, it’s also important to understand they come from a varied collection of participants.

Vanguard explains, “Median and average account balances varied considerably by participant demographics in 2022. Income, age, and job tenure are among the factors that influence account balances. These three factors are intertwined. Not only does income, on average, tend to rise somewhat with age, making saving more affordable, but older participants generally save at higher rates.”²

In other words, if you are just starting out in your career, you shouldn’t compare what you’ve saved to the overall average that includes approximately 5 million Vanguard plan participants from every age group, including those close to retirement.

This number does not help you answer the question, “How much should I contribute to my 401(k)?”

One way to judge if you are contributing too little, too much, or just the right amount is to look at your age group statistics.

Ages 20 – 24

contribute to my 401(k)

Average 401(k) balance: $5,236
Median 401(k) balance: $1,948

Those in this age group are new to the workforce and new to saving for retirement.

At this age, it is important to enroll in a 401(k) plan and start contributing.

Look to see if your employer offers matching and aim to contribute enough to receive this match (free money!).

The sooner you start saving for retirement, the better off you’ll be when the time comes.

Ages 25 – 34

contribute to my 401(k)

Average 401(k) balance: $30,017
Median 401(k) balance: $11,357

At this point, individuals have been regularly contributing to a 401(k) and increased their overall retirement savings.

It is also likely that many in this age group have more than one 401(k), considering how many change jobs early in their careers.

If you have a 401(k) left behind with a past employer, it may be costing you more than you think.

Check out The #1 401(k) Rollover Mistake – Avoid This at All Costs.

Ages 35 – 44

contribute to my 401(k)

Average 401(k) balance: $76,354
Median 401(k) balance: $28,318

These are key earning years, which is one reason there is a significant increase in 401(k) contributions from the last age group.

During these peak earning years, it is critical to prioritize 401(k) contributions.

At this stage, you should be paving the way to your retirement.

Note that there seems to be greater differences in how much individuals are contributing to their 401(k)s, as the average 401(k) balance is a good bit higher than the median balance.

Depending on several factors (income, age, and lifestyle), some individuals have been able to contribute more than others.

Ages 45 – 54

contribute to my 401(k)

Average 401(k) balance: $142,069
Median 401(k) balance: $48,301

This group is continuing to pave the way to retirement, but it is also when people start to become more aware of being “behind” on their contributions.

The good news is that half of this group is allowed catch-contributions. Those aged 50 and older can contribute an extra $7,500 in 2024 – for a total of $30,500.

If you feel behind and are 50 or over, take advantage of catch-up contributions.

Ages 55 – 64

contribute to my 401(k)

Average 401(k) balance: $207,874
Median 401(k) balance: $71,168

At this point, there is slower growth.

Additionally, people in this age group may have begun withdrawing money from their 401(k).

The average balance for those 65 and older is $232,710, while the median falls to $70,620.

Is What I Contribute to My 401(k) Enough?

contribute to my 401(k)

Even if you are one of the outliers skewing the average 401(k) balance for your age group, you still may not be contributing enough.

This is because the cost of retirement continues to rise.

According to Schwab 401(k) Participant Survey 2023, people think they need an average of $1.8 million for retirement.³

This number seems out of reach for many Americans.

Bankrate adds, “Nearly one in three (32 percent) U.S. adults working full-time, part-time or who are temporarily unemployed estimate they would need more than $1 million to retire comfortably, but 45 percent of workers say it’s unlikely they’ll be able to save enough to do that, according to a new Bankrate poll. More than half (56 percent) of Americans in the workforce think they’re behind where they should be with their retirement savings.”⁴

Bankrate also found that “52% of American workers say it’s likely they’ll be able to save enough to retire comfortably. 45% think it’s unlikely they’ll have enough to retire comfortably and 3% don’t know.”⁵

It’s good to ask yourself what position you would like to be in when it is time to retire versus how you are contributing to your 401(k).

Experts recommend using the 80% rule to determine if you are contributing enough to your 401(k) to retire comfortably.

Let’s say you and your spouse bring in $120,000 annual income. If you plan to follow the 80 percent rule, you should plan to bring in $96,000 annual income. Broken down, this equates to $8,000 a month.

Of that $8,000 a month, you can hope you will receive Social Security benefits of $2,972 a month.

But what about the additional $5,000 you will need?

Yes, you will need the additional money.

You cannot live on Social Security alone – especially when you factor in hidden retirement costs, such as healthcare expenses, long-term care, and household expenses.

And pensions are now a thing of the past.

That’s why, even if you appear to be on track compared to your age-group peers, it is still wise to contribute more.

Do what you can in 2024 to put your future self in a better position to retire comfortably.

How to Contribute More to Your 401(k)

contribute to my 401(k)

Whether you are just starting your career and beginning to save or are nearing retirement, it is always wise to look for ways to contribute more to your 401(k).

Here are a few ways to boost your savings in 2024.

Increase Contributions: Do what you can to boost your contributions. Strive to contribute enough to get the company match. Note, in 2024, employees with 401(k)s can contribute up to $23,000, up from $22,500.

Utilize Catch-Up Contributions If You Are Age 50 and Over: Behind on your retirement savings? Make catch-up contributions! For those ages 50 and older, the 401(k) catch-up contribution remains at $7,500 for 2024 – for a total of $30,500.

Seek Expert Advice: Stay engaged with your 401(k) and keep learning. Read our blog and subscribe to our YouTube channel to get the most up-to-date information about 401(k) accounts. Seek third-party advice. Just as you’d seek medical advice, it’s important to seek advice from financial advisors.

Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

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