Figuring out how much you should have saved in your 401K based on your age is not an easy task. There are several things to consider when you are trying to save for retirement. A great way to help you try and figure out how much money you will need when you hit that magical retirement age is to create a post-retirement budget. This is where you will write down all of the things you will need to pay or have money for after you are retired.
Ideally you will be debt free when you retire. That means that your house will be paid off, you will not have a car payment, your kids will have moved off and be sufficiently on their own, and you will not have some of the expenses you did in years past. You should remember to budget in medical costs since as you get older those tend to rise. You will also need to remember that annual vacation you always take and the replacement of a car or upkeep costs for your home.
Once you come up with a draft of a post-retirement budget, now it is time to start looking at your 401K and figuring out how much you should put in each year to make sure you will be taken care of during your golden years.
Let us take a look at what the rule of thumb is by age as to what you should have saved in your 401K.
Age 30: One years’ salary (using your current salary as a base).
Age 35: Two years’ worth of salary.
Age 40: Three years’ worth of salary.
Age 45: Four years’ worth of salary.
Age 50: Age 50 is a great time to really sit down and make sure you are on the right track for your savings. At this time you should have five years’ worth of salary saved in your 401K. If you do not, you might want to consider making some catch-up contributions or start saving by other means, like Roth or Traditional IRA. At this age you also want to do a check of all of your debt. This might make you adjust your post-retirement budget so you know how much money you need to have in retirement.
Age 55: At this age you should have six times your annual salary saved. You can make catch-up contributions at this point as well. Think about increasing your 401K contributions if you are not on track.
Age 60: At this age you should have seven times your annual salary saved.
Age 65: This is the age when most people who have not yet retired start to think about retiring. At age 65 you should have eight times your annual salary saved. Let’s say you are making $70,000 a year. That means you should have at least $560,000 in your 401K account.
As you are trying to figure out your retirement savings, remember to look at your employer too. Many offer a 401K match which is like free money being put towards your retirement. It is always recommended to take full advantage of the match by your employer. This will help you reach your retirement savings goals too.
It is important to make your retirement a priority. Treat it as something you have to pay monthly in order to increase what you have in your retirement savings. Make sure you can live comfortably with the retirement savings you have.
You have worked all your life and you have earned the right to have a comfortable and relaxing retirement without worrying about money!
Written by Pembroke Advisors | June 18, 2018