Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Is Maxing Out Your 401(k) Enough?

Is Maxing Out Your 401(k) Enough?

Dear Carrie,

I'm turning forty this year, and finally ready to start saving for retirement. If I contribute the maximum to my 401(k) every year, will I be okay? 

—A Reader

Dear Reader, 

First, congratulations. Sometimes making the first move is the hardest of all, so I applaud your decision. Also, you ask an excellent and often overlooked question. It's understandable for us to assume that the government-allowed maximum 401(k) contribution (in 2014 it's $17,500 for those under 50, or $23,000 for those 50 or older) would be sufficient—and sometimes it is. The reality, though, is that there is no magic number that works for everyone. To get a more reliable assessment, you have to take a deeper look.

First think about how much you'll want to spend each year

Just like at any other time of life, there is a huge range in retirement lifestyles. However, when we look at national statistics, we can see that retired households spend about 80% of what working households spend. This makes a lot of sense when you consider that although some costs such as mortgage payments and work-related expenses may go down, others such as travel, entertainment and health care may go up. So as a general guideline, I always recommend planning to spend just about the same amount in retirement that you're spending now.

Next, crunch your numbers

So is saving $17,500 a year enough? Here's a way to do a quick estimate.

Say that you'll want to spend $80,000 a year in retirement and that you expect to receive $30,000 in Social Security benefits. Your portfolio will need to generate the $50,000 difference.

The "4 percent guideline" states that you can safely withdraw 4 percent of your portfolio's value in your first year of retirement, increase that amount every year for inflation, and have a 90 percent level of confidence that your money will last for thirty years.

The corollary of this guideline is that your portfolio should be roughly 25 times larger than your first year's withdrawal. In this example, $50,000 x 25 equals $1.25 million. That's the amount you will need to have saved on the day you retire.

Now it's time to pull out the financial calculator. If you're starting from zero, want to retire in 25 years (when you're 65) with a $1.25 million portfolio, and estimate that you can earn an average return of 6 percent, you'll need to sock away about $21,500 a year. In other words, the government max of $17,500 is a little shy of your goal.

Of course your situation may be very different. You may want to retire earlier (or later), or anticipate earning a higher or lower return. And we haven't factored in variables like your current savings or the impact of inflation.

However, this can give you an idea of a good first step. At some point, though, it would be a good idea to do a more precise calculation, perhaps with the help of a financial advisor. If you do work with an advisor, he or she can talk to you about your expectations and priorities, run different scenarios, and craft a personalized plan.

Be sure to count in an employer match

Many employers will match a portion of your 401(k) contributions, in effect bumping up the amount that you can save every year. For example, if you currently earn $80,000 a year, and your employer matches up to 5% of your salary, that could mean an additional $4,000 per year of savings. Add that to your personal contribution of $17,500, and you're right on target to meet your overall retirement savings goal.

A final thought

Finally, I highly recommend that you put any savings beyond your 401(k) contributions on automatic. That way you won't be tempted to spend this money—and you will have the satisfaction of knowing that you are paving the way for a financially secure retirement.

Next Steps

What's the Best College Saving Strategy When You Have Young Kids?
What's the Best College Saving Strategy When You Have Young Kids?
Make Sure Your Money Lasts
The New Retirement Spending Plan Strategy

Important Disclosures



The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.