How Much Should You Save In Your 401K At Work?

That’s a loaded question.  “How rich do you want to be later in life?” is a better way to ask the question.

Saving for a future which comes three or four decades from now is full of “what if’s”.

·       What if I don’t save enough?

·       What if I don’t know how to envision life 40 years from now?

·       Is it possible to save too much?

·       What if I lose my job somewhere along the way?

·       Is there going to be a Social Security system in 40 years?

·       And there are at least a hundred more questions that could enter your mind…

Most articles you will read will tell you “Save 15%” of your income, or “Find a good Financial Advisor to help you devise a plan”.  In fact, the answer to the basic question is a matter of simple mathematics.

If you were lucky enough to start saving for the future when you entered the workforce at around age 20-22, you are well ahead of most people.  For the majority of people today, saving for long term financial security is not something that comes to the forefront of your mind until your middle thirties. 

It’s never too late to start saving, BUT… the sooner you can get a savings plan started, the easier it is to attend your retirement party in your late 60’s with a vault full of wealth that can make your golden years (age 65-90+) stress free and enjoyable.  Imagine having thirty or more years of stress-free retirement for $100 per paycheck, or 5% of your salary, and still have money to leave to your family when you pass on.   

Consider this example:  A saver who starts in a 401K Plan (or equivalent) at age 22, and saves 5% or their salary, say $100 per paycheck x 26 times per year, can easily end up at retirement age as a member of the top ten percent wealthiest Americans. Does that sound like a goal you could shoot for?  For retirees today, retiring with $1 million+ in retirement savings will rank you in the top ten percent club.

Inflation will have something to say about the magical “Millionaire Club”. But you can counter the effect of inflation by:

• Remain employed from now until you reach retirement age.

• Always save 5% of your salary, preferably in tax advantaged account like a 401K, IRA, or Pension Plan.

• Invest your savings in financial markets in order to achieve sufficient Annual Returns on your savings dollars.

• Stick to your savings plan and don’t raid your retirement piggy bank to finance large purchases.  

If 5% of your salary today is $100 per paycheck, then sticking to the “Save 5% rule” will automatically increase your 401K contributions  as your salary increases with annual raises, promotions, or changing jobs for higher pay, or earning additional money with a side gig, etc.

Here’s the real math:

Start at age 22, Save $100 per paycheck, 26 times per year, deposit it in your company 401k Savings Plan, earn an 8% Return on average with your investments (which is less than the S&P 500 has historically earned for over 6 decades), reinvest all gains, never withdraw from the Savings Plan to make special purchases (a home down payment, a new car, etc.).  Your ending balance will be over $1.1 million dollars.  If your salary increases by an average of 2.2% per year, and you stick to the “Save 5% Rule”, Your balance 45 years from now will be $3.5 million dollars.  If your employer(s) matches 50% of your contribution to your 401K Plan, your balance will be over $5 million.

In the year 2070, the top ten percent of savers will each have about $3.5 million dollars saved, assuming inflation moves at +2.2% over the long term (which is a reasonable assumption.)

So, in short:

                  Be A Saver

                  Save 5% of Your Salary

                  Learn about Markets and Investing in order to achieve a sufficient ROR.

                  Shoot for an average ROR of 8-10% per year by investing in the markets.

                  Stick with your plan over the long haul.

How many workers today are invested in the financial markets through their workplace savings plans, like a 401K Plans Pensions, or personal IRAs?  About 65% to 70%.  So, most workers are participating in some way to save for the future. 

In the end, being a good saver will put you in the top 10% wealthiest people in America.  There will be no money worries, plenty of travel, a stable home life, the ability to help your kids and grandkids with education expenses, etc. 

Generational Wealth is wealth that benefits not only yourself, but the generations that come after you.  It can all start with $100 per paycheck.  It’s not magic.  It’s not stealing.  It’s not being greedy.  It’s just having a simple plan.  You can do it.  Only you can make it happen.    

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