How much is optimal to have in 401K when retiring?

[Minnie824]

DH & I would like to retire in 15 years. Well, actually, I'd like to retire today, but thats another story. Anyway, what do you think an optimal amount is to have in a 401K at retirement time? I know it will depend on standard of living, etc, but just looking for some rough estimates.

 

[rhiansmom]

Most experts recommend that you can live on 80-95% of your current income depending on several factors including if your mortgage will be paid off or not in that time. Then you take out what you believe your SS will be monthly - it's a complicated process. I think the Principal has lots of calculators available on their website.

It's very complicated and each situation has to be looked at individually.

 

[ilovejack02]

Its really hard to say how much you will need. Go to the AARP website and I believe there are some worksheets on their site to help you with your calculations. DH works for Exxon Mobil and when I worked for Edward Jones investments and our Exxon guys would come into to do a roll over of their 401k they were in good shape if they had 700,000 or more in 401k. Things of course will be different in 15 ish yrs. I dont think there is a blanket amount for anyone.


http://www.aarp.org/money/

 

[HooKooDooKu]

AMAP!

I seem to recall once hearing something like the following:

You'll need to plan for needing an income equal to about 80% of your pre-retirement income.

You need to plan on withdrawing 7% of your 401K balance per year.

So if 401K is your only retirement savings, take 80% of your pre-retirement income, subtract what you expect to get in SS. Multiply that result by 15. That's the balance you need in your 401k.

Example: You make 100,000/year. You expect to get $2,500/month in SS.

100,000 * 0.8 = 80,000
2,500 * 12 = 30,000
80,000 - 30,000 = 50,000
50,000 * 15 = 750,000.

You need 750,000 in your 401k


But the bottom line is that unless you already have a significant balance in your 401k, you might as well plan on trying to contribute the maximum that you can given that the legal limit is something like 15% of your income and you've only got 15 years left.

 

[dvcgirl]

Impossible to know what you'd need based on the information you gave us. You need to take a really good look at your expenses and what you think that they will be in retirement. Do you have a pension in addition to your 401K? IRAs? Money in taxable accounts? How old will you be in 15 years....meaning how long will you need to wait between the time you retire and the time you can begin collecting Social Security. How about health insurance? If you retire before 65 do either of you work for company that will provide you with health insurance until medicare kicks in? If not, can you afford health insurance during that gap?

So, there's an awful lot to think about. But to give you a *really* rough number, you should use the 4% withdrawl rate rule of thumb for your 401K. Withdrawing any more than 4% from your 401K increases the chance that you'll deplete that account before you die (outlive your money). So look at that 4% number, add it to Social Security and pension monies if they apply and that would be your monthly income. If that covers your expenses, you'll have enough to retire.

Again, this is a really rough explanation. To really understand where you are with reference to your goal retirement date you should sit down with a fee based certified financial planner. Fifteen years is still far enough out to make any adjustments that you may need to make to meet your goals. Lots of people only begin to think about retirement 15 years (or five years out) out and find out with just a little planning that they are going to really have to kick up their savings in order to go out when they'd like. Sitting down with a professional is the best way to find out the answer to that question.

 

[dvcgirl]

DH & I would like to retire in 15 years. Well, actually, I'd like to retire today, but thats another story. Anyway, what do you think an optimal amount is to have in a 401K at retirement time? I know it will depend on standard of living, etc, but just looking for some rough estimates.

Also noticed that you have a DD who is 2 years old...meaning you guys could be relatively young. There is a penalty associated with withdrawing from your 401K before 59.5 years old.

 

[KarenAylwood]

I recently read a few articles in Money magazine about retirement (it was the retirement issue- don't know how old it is since I found it at work).

They said you should plan to live on 70-75% of the income you make when you retire, and plan on pulling out 4% of your 401K per year. And I think this is IF you don't have a mortgage when you retire.

"What amount to have in your 401K" is a huge question and one would need to know a lot of information- if you have a mortgage, how old your children will be when you retire, what assets you currently have and what other investments or savings you have. If you plan to retire in 15 years, you would have a 17 year old then. That would leave a year of legal financial obligation, as well as the question of if you're planning on helping them with college expenses.

I agree that you should sit down with a financial planner, especially if you have aspirations to retire in 15 years.

I thought that spending 80- 95% of your income and taking out 7% each year sounded like a lot. Don't they usually say you should be living on 70-75% of your income now anyway?

 

[dvcgirl]

I recently read a few articles in Money magazine about retirement (it was the retirement issue- don't know how old it is since I found it at work).

They said you should plan to live on 70-75% of the income you make when you retire, and plan on pulling out 4% of your 401K per year. And I think this is IF you don't have a mortgage when you retire.

"What amount to have in your 401K" is a huge question and one would need to know a lot of information- if you have a mortgage, how old your children will be when you retire, what assets you currently have and what other investments or savings you have. If you plan to retire in 15 years, you would have a 17 year old then. That would leave a year of legal financial obligation, as well as the question of if you're planning on helping them with college expenses.

I agree that you should sit down with a financial planner, especially if you have aspirations to retire in 15 years.

I thought that spending 80- 95% of your income and taking out 7% each year sounded like a lot. Don't they usually say you should be living on 70-75% of your income now anyway?

I agree, 7% is too much to pull out of your portfolio. And I just wanted to add that it's really very difficult to retire and maintain a similar standard of living before 60 without a pension, employer sponsered health care and a nest egg of some sort in taxable accounts. Of course, it can be done with a huge pile of money, but very, very few have that in their 40s.

The OP could be talking about retiring in their mid-40s, and that's *really* tough. Think about it. You go to school for the first 22 years or so, work another 22 years or so, and then lay back for the next 40 or so years! It's very, very hard to support yourself for 40 years with only 22 years to save. And in many cases your 40s and 50s are your peak earning years, and if you have kids, they may be your peak savings years as well.

And so if you can't "retire" in the sense that you quit your job and hit the golf course, perhaps you can "retire" to a different career. I think that this is what we're going to see a whole lot of Baby Boomers doing. They want to maintain their current lifestyle, but nearly two-thirds haven't saved enought to do that. And so they'll retire from their "career position" and go off and do something else.

Still, I say that it's good that you're thinking about this now and sitting down with a certified financial planner will help you to understand how much you'll need and show you the way to get there. Most people never even meet with a certified financial planner, and those who do wait until their 50s.

 

[alicenwonder99]

Let me first say:

I don't know where you live, your lifestyle, your income now, how many children you have, etc, etc, etc.

I'm also not any type of financial expert.

But the amount I have set in my mind for my retirement is the upper 6 figures. I saw that the $700,000 - $750,000 amount was mentioned twice already, and I have to agree with that.

We'll also assume you'll have your house paid off, your children moved out (and done with college).

Dh and I have around 25 more years to retire. I hope we can save enough by then.

Good luck saving.

Mary

 

[lisaross]

what abou people with no 401K at work???

I think i have about 100,000 saved between my husband and I - we are just about 40years old - will have our house paid off in 11 years so will the sale of my home go towards the 700,000

Lets say i sell my home for 450,000 then do i only need another 300,000????

or do you need 750,000 if you are living mortgage free???

lisa

 

[HooKooDooKu]

I beleieve that's mortgage free. After all, if you sold your house, you'd then need even MORE income to help pay for housing. So if you plan on selling your house, you'll need $1,000,000.00.

I think part of the reason that it's suggested to plan for 70-80% of pre-retirement income. When you're saving for retirement, you should have house payments. But when you retire, the house should be paid for so you only pay for insurance and taxes.

"But what about people who rent?"
Well that's why everyone's situation is different and that's why you need a financial adviser to run the numbers for your particular situation.
is the idea that you do all your calculations in todays dollars (the use formulas that then project everything into the future assuming a certain average level of inflation)

 

[taterules]

The rule of thumb I've heard recently is that if you're retiring at 65, you'll want $25 in retirement money for every $1 you plan on taking out per year (this is already adjusting for inflation, I believe). Of course, getting a solid financial plan together with all your personal information, probably with a fee-based professional, is the best idea.

 

[brendat22]

I find this thread to be very interesting as I have wondered about the "number" myself many times. My husband and I are shooting for a million, but that I believe will only pay us 50 thousand a year to live on if you follow the 4% withdrawl rule. Between the 2 of us we contribute 25 thousand a year to 401ks (including company matches). I don't see how we could possibly do more - our mortgage will be paid off in 10 years and right now we have 300 thousand saved in 401ks. We are 38 & 41 - I think we are on the right track - but still worry about it. Our twin girls are 15 so they will be independent in 20 years when we would like to retire. I guess the best thing to do is save as much as you can and hope for the best.

BTW - we have no pensions & who knows if ss will be there for any of us in 20 years.

 

[HooKooDooKu]

The rule of thumb I've heard recently is that if you're retiring at 65, you'll want $25 in retirement money for every $1 you plan on taking out per year (this is already adjusting for inflation, I believe). Of course, getting a solid financial plan together with all your personal information, probably with a fee-based professional, is the best idea.

I rule of $25/$1 is pretty much the same as drawing down 4% of the balance each year (i.e. in both cases, your money is gone in 25 years). So that would mean that inflation has NOT been taken into account.

Here's how you can take inflation into account:
1. Determine how much income per year you want in today's dollars (that's taking your current income and multiplying it by that 70-80%).
2. Determine your annual inflation index. Do this by adding the rate of inflation to 1 (3% => 1.03, 4% => 1.04).
3. Multiply your desired income (from #1) by the inflation index (from #2). Repeat this for the number of years til retirement.

Example: $100,000 income, 75% desired at retirement, 3% inflation, 10 years til retirement.
$100,000 * 0.75 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03

The result is the amount of income you'll need at a future date.
A short cut to determine '1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03 * 1.03' is to use the 'x^y' key found on some calculators (if you are running windows, you can find this key in the calculator program if you select "Scientific" from the 'View" menu). Key in '1.03' '^' '10' '='

For this example (3% for 10 years) the result of 1.03^10=1.3439.

So $100,000 * 0.75 = $75,000.
$75,000 * 1.3439 = $100,793.

So if you want a today's income of $75,000, in ten years you'll need an income of almost $101,000.

For easy access, here's a few of the multiplication factors assuming 3% inflation:

Years - Inflation Factor (assuming 3%)
1 - 1.0300
2 - 1.0609
3 - 1.0927
4 - 1.1255
5 - 1.1593
6 - 1.1941
7 - 1.2299
8 - 1.2668
9 - 1.3048
10 - 1.3439
11 - 1.3842
12 - 1.4258
13 - 1.4685
14 - 1.5126
15 - 1.5580
16 - 1.6047
17 - 1.6528
18 - 1.7024
19 - 1.7535
20 - 1.8061
21 - 1.8603
22 - 1.9161
23 - 1.9736
24 - 2.0328
25 - 2.0938
26 - 2.1566
27 - 2.2213
28 - 2.2879
29 - 2.3566
30 - 2.4273
31 - 2.5001
32 - 2.5751
33 - 2.6523
34 - 2.7319
35 - 2.8139
36 - 2.8983
37 - 2.9852
38 - 3.0748
39 - 3.1670
40 - 3.2620

You'll notice that after 24 years, you need twice as much money as today. At 38 years, you need three times as much money.

 

[Stein]

A big factor not mentioned is what you are investing the money in. If you are in a 4% CD, you will need more than if you leave it in the stock market and get double or triple in the long run - at more risk.

If you plan on a 9% return, you can take out about 6% and have 3% compounding for inflation, thus you will take out more money each year and the money will never run out.

 

[brendat22]

Bump

 

[lisaross]

what happens to all those that just can't save that much - just financially do not make that much to save????

This entire thread is a bit scary -

how much do you actually save per month? What about those on a middle income family how much can you spare to save??????

lisa

 

[Nicolepa]

what happens to all those that just can't save that much - just financially do not make that much to save????

This entire thread is a bit scary -

how much do you actually save per month? What about those on a middle income family how much can you spare to save??????

lisa

Well, you have to remember that the amount YOU have to save may be more or less depending on what you earn and how much you want to spend per year for retirement. In the examples given here assumptions have been made that your annual income is $80,000. If your income is significantly less and you are fine with your current lifestyle then you would have to save significantly less for retirement.

Now if you are making 80K per year there is no reason that you can't save that much. You just do it. From the day my DH graduated from college 25% of his (our) income has gone directly into savings 401K, ESPP etc. In addition to that 25% my dh funds an ESPP for me and a college fund for our kids. We are still in our 30's and we are well on our way to the 750K that keeps being mentioned. Personally I think that number is way low, but that is based upon our personal retirement expectations.

 

[ladysoleil]

what happens to all those that just can't save that much - just financially do not make that much to save????

This entire thread is a bit scary -

how much do you actually save per month? What about those on a middle income family how much can you spare to save??????

lisa

It is scary, but better to think about it now while you have time.

I don't think there's one number that fits everyone. I am way behind on what I would want to have put away in my retirement (my 401K lost a ton of money when the dotcom crash happened a few years ago...I lost nearly everything).

At this point, I put away as much as I can and hope for the best. If you want an actual "number", I put about 8% of my salary between a 401K through work and a Roth IRA. I save 10% of my monthly take home pay in an ING account/CD's and I put away a few bucks here and there in random stuff- really random stuff- a few loose bills for ready emergency fund money in the house, a savings bond here and there, etc.

I find the money any way I can. I just got a raise, for example. So I upped my 401K percentage. I'll never see that money in my paycheck, but it's being saved. I never had it, so I won't miss it- but I'll want it later, for sure. I spend frugally most of the time. I sock away whatever I find to sock away, even if it's just change.

I admit, I feel broke most of the time, never have money in my wallet, brown bag it a lot, don't often get nice things for myself. But I'd rather be "broke" because I'm making myself broke now, than actually broke later because I have nothing.

 

[Kramer]

I think its really hard to come up with just one number that works for everyone... there are many factors that affect how much you should save.

I'm employed by the local town government. Right now I'm 35 and I'm eligible to retire in 12 years with a state pension that would be equal to 65% of my final year's salary. I have to contribute 8.5% of my salary towards my pension. So the number I'm aiming for is to save enough to make up that other 35%. Its actually less than 35% since I am already living without the 8.5% that I contribute to my pension - which makes my target number about 26.5% of my income.

With that in mind I also contribute to a 457 deferred compensation plan at work. If I continue to save at my current pace into the 457 I should have enough saved by the time I retire to cover that other 26.5%. Right now we're looking at my wife's teacher pension and social security as a bonus and a safety net.

To the OP... I think you need to work backwards. Try and figure out what type of income you are looking for in retirement and set your savings goals accordingly.