Are Your Retirement Savings Ahead of the Curve?

Aim to max out your 401(k) plan. The 401(k) contribution limit in 2018 is $18,500. Workers age 50 and over can contribute up to $24,500. (Getty Images)

It’s difficult to determine exactly how much to save for retirement. Some people pick a round number, such as saving 10 or 15 percent of their salary, while others use an external cue, such as the amount of money that will be matched by an employer.

You might wonder whether you are saving enough to fund the retirement lifestyle you desire. “Ultimately, how much income do you think you’ll need to replace from year to year to pay for your retirement lifestyle?” says Charlie Bolognino, a certified financial planner at Side-by-Side Financial Planning in Plymouth, Minnesota. “Don’t forget to budget in everyday expenses, annual health care costs and recurring purchases, such as car replacements.” Here are some benchmarks that will help you know you are well on your way to accumulating a substantial nest egg for retirement.

Maxing out your 401(k). A retirement goal worth aspiring to is maxing out your 401(k) plan. The 401(k) contribution limit is $18,500 in 2018. Workers age 50 and over can make catch-up contributions of up to an additional $6,000, for a maximum possible contribution of $24,500 in 2018. Fully funding your 401(k) allows you to get the best possible tax deduction on the money you save for retirement. Your traditional 401(k) contributions won’t be taxed until they are withdrawn from the account.

However, only 13 percent of 401(k) participants maxed out their 401(k) in 2017, according to a recent Vanguard analysis of 1,900 401(k) plans with 4.6 million participants. Most people who max out their 401(k) earn more than $100,000 per year and also tend to have more years on the job and be closer to retirement age.

Unsurprisingly, it’s easier to save for retirement if you earn a large salary. Those earning $100,000 or more had an average 401(k) account balance of $246,171, more than twice as much as the average of $108,613 saved by those earning $75,000 to $99,999, Vanguard found. “Start small and increase your contribution by 1 to 2 percent each year until you reach the maximum,” says Kayse Kress, a certified financial planner with More With Less Financial Planning in Bristol, Connecticut. “Always make sure you are contributing enough to take advantage if your employer also provides a matching contribution.”

Hitting $1 million in 401(k) savings. Since 401(k) contributions are limited each year, it takes decades of diligent saving and solid investment returns to build up a large retirement account balance. Fidelity reports that 157,000 people have $1 million or more in their Fidelity 401(k) account in 2018, according to an analysis of 22,600 Fidelity workplace retirement accounts with 15.8 million participants. Most 401(k) millionaires have been saving for about 30 years to reach that account balance, Fidelity found.

Those who save consistently over many years are often able to accumulate impressive retirement account balances. For example, those with 10 or more years on the job have an average 401(k) account balance of $210,306, nearly four times as much as the average of $52,872 for those with four to six years at the company, according to Vanguard data. Fidelity found that employees with long job tenures have accumulated an average of $290,100 after saving in the company 401(k) for 10 years and $379,600 after 15 years.

In contrast, workers who change jobs might leave a small balance in their old 401(k) plan or roll their retirement savings into an IRA, so job hoppers often don’t have all their wealth in a single 401(k). Gaps in employment, a hiatus from saving for retirement and waiting periods to join a new employer’s 401(k) plan also result in smaller account balances.

Making catch-up contributions. Workers age 50 and older are eligible to make catch-up contributions to 401(k) plans of up to $6,000 more than younger employees. A catch up contribution involves saving between $18,500 and $24,500 in your 401(k) plan in 2018. However, only 12.2 percent of eligible 401(k) participants made catch-up contributions in 2017, according to a T. Rowe Price Retirement Plan Services analysis of 636 401(k) plans with 1.6 million participants.

Older 401(k) participants often increase their savings rate as they approach retirement, T. Rowe Price found. “Set up your own parameters for when you’ll increase your savings rates,” says Jared Paul, a certified financial planner and managing director of Capable Wealth in Albany, New York. “The easiest time to do so is when you get a promotion or raise. You’re going to have more money coming in than you’re used to, so you obviously have extra money to save.”

Beating the average savings rate and account balance for your age. The average 401(k) savings rate was 6.8 percent of pay in 2017, according to Vanguard 401(k) data. The average 401(k) account balance is $103,866. However, the amount the average person is able to save and accumulate increases considerably as people age. “The amounts they will need to save will vary greatly… for someone who wants a lavish retirement, replete with a mansion at the beach, versus someone who is interested in a more modest idea of their golden years,” says Patrick King, a certified financial planner and founder of Transformative Financial in Atlanta. “If you’re having a hard time deciding what retirement [savings rate] is realistic for you, start by saving 10 percent of your income.”

Check out whether you are beating the 401(k) averages for your age group:

Under age 25
Average 401(k) account balance: $4,773
Average 401(k) savings rate: 4.8 percent

Age 25 to 34
Average 401(k) account balance: $24,728
Average 401(k) savings rate: 5.9 percent

Age 35 to 44
Average 401(k) account balance: $68,935
Average 401(k) savings rate: 6.3 percent

Age 45 to 54
Average 401(k) account balance: $129,051
Average 401(k) savings rate: 7 percent

Age 55 to 64
Average 401(k) account balance: $190,505
Average 401(k) savings rate: 8.3 percent

Age 65 plus
Average 401(k) account balance: $209,984
Average 401(k) savings rate: 9 percent

Source: Vanguard 401(k) data, 2017.

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