How Much Should I Have in My 401(k)?

Currently, the average 401(k) balance is $106,478, according to Vanguard's 2020 analysis of over 5 million plans. If you’re nowhere near that (or even if you don’t have a plan at all), don’t stress! We got you. And, there’s still time to start preparing for retirement.

It’s important to remember that the amount you should have in your 401(k) depends on many factors, including how much you make and what percentage of your paycheck is taken out for taxes. You may not be able to afford as much now if “the man” is taking out tons of taxes, but having more money saved up will help ensure a better retirement (hello to livin’ the dream in the Caribbean after 65!).

Really, though, we get it. It’s tough not to compare yourself to others. Focusing on yourself, your family, and your own wealth is a good way to ensure you don’t fall prey to the trap of comparison. However, if you’re just starting to think about planning for retirement, it can help to have a good idea of how much money you should have stacked away in a 401(k). Here’s what to know.

Learn better via videos? Download the Wealth Stack app today to start learning how to invest as a beginner.

401(k)s Explained in Simple Terms

Okay, let's start off by explaining what a 401(k) is.

A 401(k) is a retirement savings account with tax benefits. You put money in before taxes are taken out, it accumulates over time thanks to compound interest, and your total balance will grow without being taxed each year. Since you’re investing pre-tax income, it reduces your taxable income for the year. You save for your retirement and pay less taxes; that’s a win-win if we’ve ever seen one.

What's especially cool about these types of retirement plans, though, is that employers often match your contributions (up to a certain limit).  So, if you contribute $3,000 to your 401(k), for example, your employer might put in an extra $1,500, which is 50% match. Wanna know what else it is? It’s basically free money! That’s why everybody talks about maximizing your 401(k) contributions while you can.

401(k)s do have contribution limits, though. In 2021, you can contribute a maximum of $19,500. If you’re over 50, you can contribute an additional $6,500.

To learn more about contribution limits, read our guide on What Are the 401(k) Contribution Limits for 2021?

How Much Should You Contribute to a 401(k)?

If you’re able to, we suggest maximizing your contributions each year as young as possible. Why? Well, for starters, it helps lower your tax burden. So, you’ll simply be adding to your own retirement savings fund as much as possible instead of paying the government taxes. That’s an obvious plus.

Aside from that, though, the more you contribute to your 401(k) while you’re young, the more compound interest it will earn (more on that here). On top of that, there’s the added benefit of an employer match. If your employer will match your contributions up to a certain limit, work to at least contribute that much.

Still not sure how much to contribute each year? To help you understand how much you should have in your 401(k), it’s helpful to think about the following formula. Multiply your age by 20% and then subtract that number from 100. 

For example, if a person is 40 years old, they should have 60% of their salary saved up in their 401(k) account. If you're just starting out with a new company or don't earn very much yet, try saving 10-20% of your paycheck each month until it reaches at least 50%.

Think taxes are interesting? Here are some strategies on How to Reduce Capital Gains Taxes.

How Much Should You Have in Your 401(k) at Every Age?

The average 401(k) balance varies by age, which we’ll get into below. Still, though, it’s important to remember that if you’re below the average, it doesn’t mean that you’re necessarily doing anything “wrong.” Remember to consider your own personal financial and career situation before comparing yourself to others. In fact, just don’t compare yourself to others and focus on yourself.

If you’re interested in the average 401(k) balance by age, though, check out these stats from Personal Capital for 2021:

AGEAVERAGE 401K BALANCEMEDIAN 401K BALANCE25-34$26,839$10,40235-44$72,578$26,18845-54$135,777$46,36355-64$197,322$69,097

Now, you’re probably thinking, “Cool, but why such a big difference between the different age groups?” It all comes down to compound interest! Compound interest is the interest that accumulates on both the principal amount and the interest on it. But here, let’s use a real-world example to make sure you’re getting us.

Let’s say you have $1000 in the bank that earns you an annual interest of 5%…

  1. In the first year, you earn 5% of $1000, which is $50, giving you a balance of $1050.
  2. In the second year, you would earn 5% of the new balance ($1050), which is $52.5. Add that onto your existing balance, and your new balance adds up to $1,102.50. 
  3. In the third year, you would earn a 5% interest of $1,102.50, which is equal to $55.125, increasing your balance to $1,157.625. In the next year, you get 5% of the new balance in your account, and so on.

For a full breakdown of how incredibly powerful compound interest is in terms of building wealth, check out our guide to Compound Interest Explained.

Start Investing in Retirement Accounts Early

As mentioned above, it’s important that you start investing in retirement accounts as early as possible. This includes your 401(k. 

When you focus on compounding your investments for retirement, you’re helping ensure that that money grows exponentially. Let’s break it down with a real example. For the sake of this example, we’ll use a 25 year-old who is aiming to retire at 50. The 25 year-old invests $20,000 with an annual percentage yield of 12%. Let’s say the interest compounds annually. The equation we’ll use here is:

$20,000 x [1.12^25]

Following this equation, the 25-year old would have a total of just over $340,000 after 25 years. And, that’s assuming that they didn’t invest anything else into that same account and just left it there for 25 years.

Now, let’s say that someone else invests in the same account, under the same circumstances, with the same amount of money, just at the age of 35. The difference in the final result by waiting 10 years to start investing is massive. That person would only earn just over $109,471 by the time they reach the age of 50, which is over $230,500 less, all because they waited 10 years to start investing!

However, the effects of compounding interest don’t stop there! They’re exponential for the one who got started at 25 versus the one who got started at 35. Let’s do the math of what each would have by the time they reach the age of 60.

Start Investing Today

Eager to learn more lessons like these as you build wealth and save for retirement? Whether 

you’re investing in a 401(k) or in Tesla stock, we can help guide you through the game. 

When you create a Wealth Stack account, you’ll have free, instant access to hours of helpful finance videos. Learn your way through the basics of investing and then chat with any one of our investment pros. They’re here to help you. We all are.

Download the Wealth Stack app here to get started.