Average 401k Balance At Age 22
The average 401k balance at ages 22-24 is actually pretty impressive, and indicates that young people using the Personal Capital Dashboard are taking their retirement savings seriously. When youre in your early 20s, if youve paid down any high-interest debt, endeavor to save as much as you can into your 401k. The earlier you start, the better. As you can see from the potential savings chart , compounding interest is no joke.
Invest Outside Your 401
The fees you pay to your 401 plan may also be limiting the growth of your retirement savings. Check your 401 statements or ask your benefits administrator to clarify your plan administration fees.
While it’s not unusual for a small company to charge 401 administration fees of 1.5% or more, those fees do limit your growth potential — particularly when they’re on top of high mutual fund fees. If you’re absorbing mutual fund fees of 1% and plan fees of 1.5%, you’ll have a hard time achieving market-level growth no matter how you’re invested.
Your alternative is to invest some of your money elsewhere. Contribute enough to your workplace plan to max out any employer matching contributions, but consider saving additional amounts to an IRA or a taxable brokerage account. In a standard brokerage account, you will incur taxes annually on interest, dividends, and realized capital gains. But you can manage around that somewhat by holding tax-efficient funds and stock in companies that don’t pay dividends.
Can You Lose Money In A 401
Yes. Because your 401 will be invested in various assets , your portfolio will be exposed to market risk. If the stock market crashes, the stocks component of your portfolio will also go down in value. This is why it is responsible to begin shifting into less-risky assets like bonds as retirement approaches. Note, however, that even bonds can lose money, such as in a rising interest rate environment.
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The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Refrain From Borrowing From Your 401k Account
The first way to grow your 401k account is to refrain from borrowing from it.
As financial planner Bob Mecca, founder of Robert A. Mecca & Associates once said, many people dont have enough saved for retirement in the first place, and when they take their 401k out of the equation and borrow the moneythen that money is no longer working for their retirement needs.
One main reason to stop borrowing from your 401k account is to avoid fees and penalties. A personal loan is a better option.
If you take some money out of your 401k account before youre 59 1/2, youll get hit with 10% penalty for the early withdrawal and owe income tax on the amount withdrawn.
Borrowing from your 401k account is acceptable only under urgent circumstances. For example, if you cannot get qualified for a loan or no family members would loan you any money for an emergency, it would make sense to borrow against your 401k account.
Another way borrowing from your 401k account makes sense is if youre using that money to purchase a home.
So borrowing against 401k account is not advisable unless you absolutely have to.
Consider getting a personal loan instead of borrowing from your 401k. Find the lowest personal loan rate today.
Payoff From Solid Retirement Planning
So, what happens to your 401 balance’s growth if you start at 25 and keep going until age 72?
If you start to save at 25, to build $3 million in retirement savings by the time you reach 72, you have to sock away just over $156 per week, or about $8,134 a year to your 401, according to the investment goal calculator at buyupside.com.
That amounts to 15% of an annual salary of $54,227. That’s reasonable for a 25-year-old now.
And 15% is the annual rate of contribution that virtually all financial advisors recommend.
If you get a 401 matching contribution from your employer of, say, 3%? Then all you need to kick in is 12% of your salary. $8,134 is 12% of a $67,782 salary.
Take Your 401 With You
Most people will change jobs more than half-a-dozen times over the course of a lifetime. Some of them may cash out of their 401 plans every time they move, which can be a costly strategy. If you cash out every time, you will have nothing left when you need itespecially given that you’ll pay taxes on the funds, plus a 10% early withdrawal penalty if you’re under 59½. Even if your balance is too low to keep in the plan, you can roll that money over to an IRA and let it keep growing.
If you’re moving to a new job, you may also be able to roll over the money from your old 401 to your new employer’s plan if the company permits this. Whichever choice you make, be sure to make a direct transfer from your 401 to the IRA or to the new company’s 401 to avoid risking tax penalties.
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Supplement Your 401 With A Roth Ira
Some employer 401s suffer from a lack of investment options. This is where an individual retirement account comes in handy.
And if your employer doesnt match contributions, you might choose to forgo your 401 altogether, says Ned Gandevani, program coordinator and professor in the masters of science in finance program at the New England College of Business. When theres no contribution from your employer towards your plan, theres no need to invest in it. By investing in a restricted plan, you end up paying too much with no benefits from your employer.
Extra Benefits For Lower
The federal government offers another benefit to lower-income people. Called the Saver’s Tax Credit, it can raise your refund or reduce the taxes owed by offsetting a percentage of the first $2,000 that you contribute to your 401, IRA, or similar tax-advantaged retirement plan.
This offset is in addition to the usual tax benefits of these plans. The size of the percentage depends on the taxpayer’s adjusted gross income for the year and tax-filing status. The income limits to qualify for the minimum percentage offset under the Saver’s Tax Credit are as follows:
- For single taxpayers , the income limit is $34,000 in 2022.
- For married couples filing jointly, it’s $66,000 in 2021 and $68,000 in 2022.
- For heads of household, it maxes out at $49,500 in 2021 and $51,000 in 2022.
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Automate Your Contribution Increases
Many employers now offer an automated contribution increase feature in their 401k plans. Employees who participate in this feature see their contributions automatically increase each year, usually by 1 percent. Boosting your contribution limit by 1 percent a year can double your 401k balance in just five years.
If your employer does not offer the feature, or you want to boost your contribution level by a higher amount, you can still use this strategy. You will just have to manually increase your contribution amount each year. Talk to your human resources department to find out how your company manages 401k contributions.
|Auto Increase Contribution Each Year|
The More Money Your Retirement Savings Earn For You The Less You’ll Need To Contribute To Hit Your Goals
Whether you’re just opening your first retirement savings account or you’ve had one for decades, you need to make sure your 401 is set up to bring in as much money as possible. The higher your investment returns are, the less money you’ll need to save out of your paycheck in order to have enough money once you retire.
Let’s go through the steps of priming your retirement savings for impressive long-term gains.
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Before You Rebalance Your 401
Before you get started with rebalancing, its helpful to review your risk tolerance, time horizon and investment goals. As a general rule of thumb, you can afford to take more risk when youre younger. As you move into your 50s and 60s, its typical to begin reducing your exposure to stocks as you have less time before retirement to recover from any significant market volatility.
Consider what your target asset allocation should be now, based on your age and risk tolerance, and whether its changed since the last time you rebalanced. If youre using an age-based asset allocation rule, for example, you may want to run the numbers again using your current age. So if youre using the rule of 120 and youre 35 years old, then you should have 85% of your assets in stocks and 15% in bonds.
You may have completed a risk tolerance or risk assessment questionnaire when you enrolled in your 401. While these can be helpful, theyre not necessarily the final word on how you should allocate assets. If its been a while since you enrolled, its important to reassess your risk tolerance to make sure youre on the right track with rebalancing.
How Often To Rebalance A 401
There are no hard and fast rules about how often you should rebalance your 401. At a minimum, its a good idea to rebalance at least once a year. For example, you might choose to do some rebalancing during the fourth quarter. You can also use this time to check your elective salary deferral amounts and consider increasing your 401 contributions heading into the new year.
You may consider rebalancing quarterly or semiannually if youd prefer to check in with your retirement account more often. Or you could use a percentage-based approach to 401 rebalancing. For instance, you may choose to rebalance if your asset allocation changes by 5% or 10%. This may require you to check in with your plan more frequently, however, so you may prefer to try quarterly or every six months instead.
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Balance Retirement Savings And Paying Down Debt
Most likely, saving for retirement is not your only financial goal. Far from it.
Youll likely need to balance your 401 contributions with paying down debt or saving for other goals like a house or a family.
Thats fine. Just dont use competing goals as an excuse to forgo making 401 contributions. Youll miss out on the prime years to make your 401 a million-dollar nest egg. Even if you have debt, contribute enough to your 401 to get your employer match. Then, as you clear money out of the debt pile, reallocate the funds to the retirement pile through payroll deductions.
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Work With The Right Financial Advisor
You can talk to a financial advisor who can review your finances and help you save 100k . Find one who meets your needs with SmartAssets free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
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How To Prepare For Your Retirement
Not everyone gets the opportunity to invest in a 401 early in life. As soon as it becomes available, its best to consider taking advantage of this benefit.
As of 2022, individuals under 49 can legally contribute $20,500 per year. Those 50 or older can save an additional $6,500 as a catch-up contribution. Starting early will allow you to have more saved by the time of retirement.
Whether It’s Time For A Financial Advisor
If you still have questions or concerns about managing your investment portfolio, you may also want to consult a financial advisor for personalized financial advice. A variety of financial planners exist for every need and budget.
Look for an advisor or planner who is a fiduciary, which means they are legally obligated to act in your financial best interest, not theirs. A certified financial planner could help you build a comprehensive financial picture and plan for your goals. An investment advisor can offer you personalized investment advice and management for a fee. And if you have significant resources to invest, a wealth manager can connect you to an array of high-end services, including estate and tax planning.
More retirement resources
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Automating Your Savings Could Mean You’ll Have More Money For Retirement
This chart shows that if you miss making contributions, you could lose a lot of money for your retirement. If you save $100 per month for 40 years, for a total investment of $48,000, it could grow to $196,857. But if you skip 2 of the $100 contributions a year for 40 years, for a total investment of $40,000, it could grow to only $164,058.
Get Team 401 And Team Roth Ira On The Same Side
When it comes to your 401 and a Roth IRA, theres no need to pick sides! The investments you choose for both accounts should complement each other. They should work together to help you make the most of the stock markets growth while limiting your risk.
Dont know where to start? The SmartVestor program can connect you with experienced investment professionals who can help you find out if youre on track to meet your retirement goals and what you can do to make your outlook even brighter.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.Learn More.
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What Your 401 Could Look Like In The Next 20 Years
For building retirement savings, 401 plans have become one of the better deals. Traditional 401s allow you to save pre-tax dollarsbefore you get your paycheckto build a retirement nest egg. Since 2006, a Roth version of the 401 has been added to many workplace plans using after-tax dollars, it allows you to build savings that you can withdraw tax-free in retirement as long as you meet certain prerequisites. Many employers provide matching contributions to employee plans, making them an even better deal.
There are many 401 savings calculators available, and all of them demonstrate how your retirement account balance can grow over time. Even a modest level of savings that is allowed to grow over a period of many years can grow into a significant sum of money.