How Much Should Be in Your 401(k) at 30?
You know the importance of saving for retirement early, right? Perhaps you also know that money you put into a 401(k) or individual retirement account (IRA) in your twenties is more valuable than money you contribute down the road thanks to the miracle of compounding interest.
But just how much should you have saved for retirement before your thirtieth birthday?
Assuming you have been working since you were 22 or 23, at 30, a great target is to have a 401(k) or IRA equal to about one year’s salary.
For example, if you make $40,000 a year, you could try to have $40,000 saved for retirement. (And if you did save $40,000 before turning 30 and never added another dime, you could have as much as $600k by age 65 with an eight percent annual return).
That said, don’t freak out if your retirement saving isn’t on this level yet. The sooner you start, the better. But if you start at 30 and don’t plan on retiring until you’re 65, that still gives your money plenty of time to earn interest.
No two investors are alike, especially beginning investors. Your starting salary range and the number of years you have been working are going to be much bigger factors in determining your retirement savings balance at 30 than they should be at 40 or 50 when you will have had additional years to make catch-up contributions or adjust your portfolio as necessary.
Differentiating Factors
There are couple of good reasons some twentysomethings don’t start putting away for retirement immediately:
- You’re in grad school
- You’re battling big debts
If you’re a student, it’s unlikely you’ll have extra money to tuck away for retirement. And that’s okay, because your education will hopefully improve your lifelong earning potential.
If you’ve got high-interest credit card debt, your top priority should be to pay that down. Debt interest rates could crush even the best retirement account returns, so it’s best to use extra funds to dispatch credit card balances quickly. The one exception? If your employer matches 401(k) contributions. In this case, contribute the maximum percentage your employer will match, then increase retirement savings after your debt is gone.
An Example
What does it take to save your annual salary in a retirement account before you turn 30?
Let’s assume you start work at 22, can immediately contribute to a 401(k), and that your employer will match 50 percent of your contributions up to a maximum of 6 percent of your salary. Assuming an eight percent average return and annual raises of three percent, you’ll need to contribute 10 percent of your salary every year to reach this goal.
| Age | Salary | 401(k) Balance |
|---|---|---|
| 22 | $30,000 | $2,700 |
| 23 | $30,900 | $5,697 |
| 24 | $31,827 | $9,017 |
| 25 | $32,781 | $12,688 |
| 26 | $33,765 | $16,742 |
| 27 | $34,778 | $21,212 |
| 28 | $35,821 | $26,133 |
| 29 | $36,896 | $31,544 |
| 30 | $38,003 | $37,488 |
Factoring in Irregular Income and Raises
Today many twenty-somethings will work several jobs before turning 30. If this is you, it means your income will fluctuate considerably. Ambitious? It is also possible that your salary could as much as double between the time you start working and 30. In these cases, set an absolute 401(k) savings goal for the time you turn 30 rather than using your annual earnings as a guide. (Also, be sure to consider the impact of vesting schedules on employer-matched retirement funds).
Rollover 401(k)s into IRAs when you leave jobs and stay on top of your investments. Keep them simple, like index funds and target-date funds, but make sure they’re aggressive. Finally, consider opening a Roth IRA and contributing as much as you can (up to the $5,000 limit) to supplement your 401(k). Unlike your 401(k), contributions to a Roth IRA are made with post-tax dollars, but once you retire the withdrawals are tax-free.
How should you save for retirement? My rule of thumb is that your contributions, up to the legal 401(k) contribution limit of $15,500 (in 2009), should be just large enough to feel uncomfortable. Think about what you could contribute. If you say, “I wouldn’t miss another $100 a month,” then consider going higher until you say “that might get a little tight.” Pull back five or 10 percent from that discomfort zone, and invest away!
- Take Action: Open an IRA online now
Related Posts
- What to Do If Your Employer Cuts Its 401(k) Match Benefit
- What To Do If Your Employer Doesn’t Offer a 401(k) Plan
- Pay Off Credit Cards or Contribute to a 401(k)?
- 401(k) Q & A
- Reader Question: Should You Ever Defer 401(k) Contributions?
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I am 31 and my husband is 35. Collectively, we have about $283k in our retirement accounts ($53k in mine and ~$230k in his). We don’t have a house and rent in Manhattan and are frantically putting away money in our savings accounts (currently at ~$230,000 collectively). I started working right out of college and my income started off at $9k in my first year (Americorp) and went up to $29k the next year and went up sporadically after that point. Currently, I make $80k and have just started to max out my 403b plan. My company contributes 4% of my salary to my 403b regardless employee contributions. I’m sad that I didn’t immediately start contributing to a retirement plan right out of college but I barely had money to spare and spent my funds paying down my student loans and credit card debt. We are now loan and debt free!!! My husband makes a lot more than me and is definitely instrumental in keeping our net worth high but I’m happy that I can hold my own relatively.
My wife and I are 30 years old, I make approx $92K/year she makes $32K/year our 401K (split between 401K & roth 401K) approx $119K, rothIRA $3K, emergency fund of $15.5K, brokerage account $10K. Own 3 cars (paid for) & home (25% equity), no other debt. She is about to stay at home after the birth of our second child. I think we are doing OK. Keep saving & never stop, live below your means
I’m 40, my wife is 37. We have a combined $317K in 401k, $45K in CD, $6.5K in savings, $23K in brokerage, own some land in FL that the value of which has been shot, no car payments, no debt, $303K mortgage. We live in a good suburb of Minneapolis.
I am amazed at how much some have in their retirement accounts. What kind of percentages of your income are you all saving? I am currently putting 4% into my company 401K with a 50% match. It will take me a long time (and good returns) to accumulate 200-300K in mine…
Having no kids helps…
If you are putting away $5000 a year and have your money sitting in index funds, you’re going to go nowhere fast.
I would be interested to hear your theory, but off the bat I disagree. Interesting book changed my view: Little Book of Common Sense Investing- James Bogle – founder of Vanguard.
I have no idea how these people have so much saved. If you have more than 75 grand in your 401k at 30, I would bet my 401k that you have more than 98% of all Americans.
I think it has a lot to do with where you live. For example if you live in the east cost where salary and home prices both tend to be high, you have opportunity to gain more from home sales and save more from working.