The average Social Security check will only suffice in replacing about 40% of the typical worker's pre-retirement income. Because most retirees will require 70% to 80% of their previous income to pay their senior living expenses, and some might need even more replacement income, relying on Social Security alone is a bad idea. Rather, you should aim to save independently for retirement, which means contributing to a 401(k) if your employer offers one.
The benefit of saving for retirement with a 401(k) is twofold. First, your contributions are made with pre-tax dollars, which means instant tax savings up front. Additionally, the money in your 401(k) gets to grow on a tax-deferred basis until retirement, which means you won't pay capital gains taxes on your investments year after year. It's this benefit, in fact, that allows countless savers to turn relatively small contributions into a much larger sum over time.
Knowing what your 401(k) will be worth in retirement can help you determine whether you'll have enough income to pay your bills, or whether you'll need to start saving more during your working years. Thankfully, we have a helpful tool for running the numbers and seeing how your savings stack up.
A simple way to save
The great thing about 401(k)s is that they make the process of saving for retirement simple. All you need to do is decide how much of your paycheck to contribute each month, and your employer will typically handle the rest.
Now let's talk savings goals. Ideally, you should aim to consistently put away a minimum of 10% of each paycheck for retirement. This will help ensure that you have enough income to cover your senior living costs, which include housing, transportation, food, clothing, and healthcare.
Keep in mind that while some of your expenses are likely to go down in retirement, this won't be the case across the board. Your healthcare costs, for example, are more likely to go up than down once you stop working, and unless you've paid off your mortgage, your housing costs might climb due to increasing property taxes and maintenance. That's why it's crucial to take stock of your savings in advance, and to that end, you can use the following tool to see how much money your 401(k) is likely to have by the time retirement rolls around:
To use this calculator, you'll need to input some key information, including:
- The number of years you have until retirement
- Your current 401(k) balance
- Your current 401(k) contribution, as a percentage of your salary
- Your employer's 401(k) match
- Your anticipated returns on your 401(k) investments prior to and during retirement
- The length of time you expect to need money in retirement
Based on this information, our calculator will tell you how much your 401(k) is likely to grow to.
How much should you contribute to your 401(k)?
Most people are advised to contribute at least 10% of their salary to a 401(k), but if you're behind on savings, it's a good idea to aim even higher. Currently, workers under 50 can contribute up to $18,000 tax-free to a 401(k). If you're 50 or older, you get a catch-up provision that brings this limit up to $24,000.
If you can't max out your contributions, you should at least make certain to kick in enough to take full advantage of your employer's 401(k) match. Though 92% of companies offering a 401(k) give employees some sort of match, it's estimated that 25% of workers don't contribute enough to get their hands on that free money. All told, workers are leaving a good $24 billion in unclaimed matching dollars on the table every year. Ouch.
Another thing to keep in mind about your 401(k) is that the higher an average yearly return you're able to generate, the less money you'll need to contribute to reach your savings goals. Or, to put it another way, if you adopt an aggressive investment strategy, you'll turn a relatively small amount of savings into a considerable sum over time.
That's why it pays to invest in stocks if retirement is still decades away. A stock-heavy portfolio is likely to give you an average yearly 7% or 8% return, while a more conservative portfolio might only yield half as much. Assuming you're able to save $300 a month for 30 years in a 401(k), a stock-focused strategy could easily leave you with an ending balance of over $400,000. A conservative strategy, by contrast, might leave you with just $200,000 for retirement.
The eventual value of your 401(k) will ultimately depend on how much you save each year, the number of years you save, and the return your investments generate. If you start early, invest wisely, and do your best to max out your employer's matching contributions, you stand a good chance of amassing a sizable nest egg that will provide a healthy amount of income in retirement.
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