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How Much Do You Need in Your 401(k) to Retire?

Saving for retirement is one of the most important financial planning goals for most Americans. However, the question of how much you’ll need to retire is often quite personal and uncertain. But for many American workers, a 401(k) plan is the vessel used to save for retirement. Figuring out how much you should have in your 401(k) at any point in your career and at retirement can be challenging. You’ll have to take into account a number of things, including where you want to live, what you expect your lifestyle to be and when you plan you retire. If you have in-depth questions about your retirement plans, consider working with a local financial advisor.

What Is a 401(k)?

A 401(k) is a defined contribution retirement plan that many companies offer their employees. You put a portion of your paycheck into the plan, before taxes, and invest it in various mutual funds and other investments. The money then earns returns throughout your working life, growing your retirement savings. Then when you retire, you can start making withdrawals, though you’ll owe taxes on them then. For reference, the 401(k) contribution limit for 2021 is $19,500.

Some companies offer 401(k) matching as well. This means you get extra money from your employer, based on how much you contribute. This is free money, so be sure to take full advantage if your company offers it. Matches are typically limited to a certain percentage of your annual salary, like 3%.

Your 401(k) Savings and Where You Want to Retire

Where you plan on spending your retirement will have a major impact on how much money you’ll need to save in your 401(k). A number of different factors fall under this bucket, each with its own impact on your savings needs.

Cost of living is the most basic factor here. For example, retiring in Hawaii may seem like a tropical dream, but the cost of living in Hawaii is exceptionally high. If hitting the beach to surf in Oahu everyday is something you really want, you’ll have to make sure you have enough money in your 401(k) to cover the cost of living.

Big cities like New York and Los Angeles also have predictably high costs of living. However, more remote places like Montana and New Hampshire have much lower costs of living though, so you’d need less in your coffers if you opt to settle in places like that.

Another location-based retirement savings factor to keep in mind is taxes. Each state has its own tax codes, and some don’t have any income tax at all. Make sure you understand the tax policies of the state where you plan to retire so you have a sense of how much taxes will eat into your 401(k) savings over time.

For example, Texas does not charge any income taxes. That means when you withdraw funds from your 401(k) as a resident of Texas, you won’t have any state taxes taken out. On the flip side, though, Texas has exceptionally high property taxes. So if you plan on buying a sprawling ranch in the Lone Star State, you property tax bill could be quite high.

Your 401(k) Savings and When You Want to Retire

How Much Do You Need in Your 401(k) to Retire?

When you retire is another premier factor in determining how much money you’ll need in your 401(k). Though the average retirement age has shifted throughout the years, most people still retire some time in their 60s or 70s. Remember, though, that modern medicine means people are living longer. If you plan on being healthy until you’re in your 90s, retiring at 65 means you need enough money in your retirement account to survive another 25 years within whatever lifestyle you choose.

You might not know exactly when you want to retire, but you should try to have a general idea. If you work a relatively low-stress job, you might want to work a few more years to make some more cash. This would also mean you’ll have fewer years where you’re surviving solely off of retirement income. Just adjust your savings to match the general age at which you think you’ll retire.

SmartAsset’s retirement calculator can help you plan our your retirement savings needs for specific ages and locations. Information you’ll need to run a calculation includes where you want to retire, your current annual income, your Social Security election age, your monthly savings and a few other factors.

Your 401(k) Savings and Your Desired Retirement Lifestyle

How you want to live out your golden years is another huge factor in what your 401(k) savings will need to look like. That’s because retirement has evolved over time to become a more active time of life. It’s now viewed as a new beginning to our lives rather than a beginning of our end. That shift in mindset has driven the need for additional sources of retirement income.

The Employee Benefit Research Institute study on the Expenditure Patterns of Older Americans shows that as we age our expenses decline. Using age 65 as a benchmark, the study found that household expenses drop by 19% by age of 75 and 34% by age 85. The study also found that people over the age of 50 spend 40-45% of their budget on their home and home-related items. The bottom line is that by the time we retire our expenses are down between 20% and 40%. This is why expert opinions differ on how much of our pre-retirement income we need. Guidelines generally vary from 60% to 80%.

If you have a household income of $100,000 when you retire and you use the 80% income benchmark as your goal, you will need $80,000 a year to maintain your lifestyle. Assuming your 401(k) savings grow at 8%, you should expect to have up to $80,000 a year in interest income so you can avoid having to touch your principal as much as possible.

What if your household income at retirement is $200,000 and you only have $1 million stashed away? Do you really only have half of what you will need to retire comfortably? Fortunately, a study by a group within the National Institutes of Health (NIH) found that roughly 80% of seniors owned their own homes. Of those, roughly 55% owned them free and clear of debt. The majority of the remainder had very little mortgage and equity debt remaining.

Bottom Line

How Much Do You Need in Your 401(k) to Retire?

When figuring out how much money you’ll need in your 401(k), consider all factors. The most important are where and when you want to retire and what lifestyle you want to live. This will cover just about all of your possible expenses. However, it might also be smart to plan how many vacations you’ll take so you can account for those too.

It’s important to start saving early in order to plan for retirement. This includes contributing as much as you can to your 401(k) each year. It’s always a good idea to contribute at least enough money to take advantage of your employer’s maximum matching contribution.

Tips for Getting Retirement Ready

Photo credit: ©iStock.com/Youngoldman, ©iStock.com/subodhsathe, ©iStock.com/Sabrina Bracher

Frank Addessi Born and raised in the center of the known universe, Brooklyn NY, and currently hiding out in the bucolic hills of northeast Pennsylvania writing about personal finance. His expertise includes personal loans, credit cards and retirement. It's not easy living the American Dream but someone has to do it!
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