How much do I need in my 401k to retire?

Saving for retirement is a powerful investment, thanks to compound interest. As you set aside part of your paycheck for retirement, these retirement savings grow tax-deferred over the years. As you approach retirement, it is common to ask yourself “how much do I need to save for retirement?” Learn how much you need to have in your 401(k) when you retire.

You can estimate how much you will need to save in 401(k) to retire using the 4% rule. This rule states that you can live off 4% of your retirement income every year for 30 years. Start by estimating the amount you will need in retirement every year, and divide these expenses by 4%. For example, if your estimated income in retirement is $50,000, it means you will need to save $1,250,000 for the retirement savings to last at least 30 years i.e. 50,000/0.04

What percentage should you contribute to my 401(k)?

Financial advisors recommend saving 10 to 15% of your paycheck for your retirement. If you started saving in your 20s, you have more time to save for retirement, and more time for the money to grow throughout your working life.

If you started saving for retirement later in life in your 40’s or 50’s, you may want to contribute more to your 401(k) to catch up. If your employer offers a match, you should contribute as much to collect the maximum employer’s match.

Generally, you should maximize your contributions up to the annual contribution limit. The more you set aside out of your paycheck, the more financial security you will have when you retire. For 2022, you can contribute up to $20,500, up from $19,500 in 2021. You can contribute to both 401(k) and IRA simultaneously if you exhaust the annual 401(k) limit.

How much do you need to save to retire?

Financial advisors’ rule of thumb is to determine the optimal savings rate based on the 4% sustainable withdrawal rule. This is the amount that you can withdraw from your retirement plan, and still expect the nest egg to last a minimum of 30 years.

To estimate the amount you will need in retirement, take the estimated annual expenses in retirement and divide by 4%. If you estimate you will need $50,000 to live comfortably, you will need to save $1.25 million i.e. 50,000/0.04. Similarly, if you estimate you will need $80,000 to live comfortably, you need to save $2 million to live a comfortable retirement life.

What determines how much you need to save to retire?

Your personal savings goals may be influenced by these factors:

Where you want to retire

Where you plan to live when you retire has a major impact on how much you will need to save in your 401(k) to retire. Some US states tend to be more expensive than others.

If you want to retire in Hawaii or New York, you will need to save more in your 401(k) to afford the cost of living there. However, remote areas like New Hampshire have a lower cost of living, and you can live comfortably on a modest income.

You should also consider the amount of taxes you will pay to live in your preferred states or cities. Some states like Texas have high property taxes, and you can expect a big tax bill at the end of the year. However, Texas does not have income taxes, and you won’t pay any state income taxes on your 401(k) withdrawals. Understand the tax structure of the state where you plan to retire so that you know how much taxes you will pay out of your retirement income.

When you want to retire

The age when you plan to leave employment for retirement impacts how much you need to save in your 401(k) to retire.

The age when you plan to retire has an impact on how much you need to save to retire. Typically, the longer you delay your retirement, the fewer savings you need since you will have fewer years in retirement. Delaying your retirement gives your money more time to grow through compounding.

Though the retirement age has changed over the years, most people retire in their 60’s and 70’s, or even later if they are healthy. If you are young, you might not know when you will retire, but you should have an idea of when to retire so that you can plan how much to save.

If you work in a less stressful job and you are happy in the company, you can extend your retirement by several more years to stash more cash into your 401(k). For example, if you are 65 and you expect to live healthy until 90, you can work five more years, so that you will have fewer years to live solely on your retirement income.

Your retirement lifestyle

The lifestyle you want to maintain in retirement also determines how much you need to have in your 401(k) when you retire. For most people, retirement marks a new beginning when they need to step out and travel around the world.

If you want to maintain your current lifestyle in retirement, you will need at least 80% of your current household income. If your current annual income is $100,000, you will need at least $80,000 to maintain the same lifestyle in retirement. If you expect your expenses to be more than they currently are, you will need to save more to afford your expenses in retirement.