You May Need Help From a Professional for Your Retirement if You Have Less Than $150K in Your 401K

As you move closer to retirement, the reality of your future becomes more evident. What once appeared as a far-fetched dream of a non-working life, where time is dedicated to hobbies and passions, now takes shape as a life lacking a stable income. Your diminishing risk appetite restricts investment in high-risk, high-reward instruments, while health concerns hinder the ability to work and earn additional income. At this time, your accumulated savings from preceding years emerge as the sole savior. By saving diligently, you can pave the path to a fulfilling retirement. However, failing to save adequately may lead you down a challenging and uncertain road.

You may have several questions about how much money should be in your 401(k) before you retire, how you can secure your retirement, and whether you have a comprehensive retirement plan. A financial advisor can help you arrive at the answers. In this article, we will also discuss how to ensure a financially secure retirement and build your 401(k) if you feel like you’re lagging behind.

What to do if you have less than $150K in your 401K

The first thing to assess at this point is your savings in comparison to your age and income. If you are young or have some years to retire, you can compensate for the lost savings. Your income will also determine how much you can save up in these years. For instance, if you are a high-earning individual, you can save a substantial portion of your salary and put it towards your future financial needs in retirement. However, if you are 60 years old and have no retirement savings, it may be harder to make up for the financial gap. In this case, hiring a financial advisor to help you plan ahead can be imperative.

A financial advisor can provide valuable guidance on various aspects of retirement planning. They can assess your current financial situation, including income, expenses, and assets, and help you determine the best course of action. They can calculate the amount you need to save each month or year to reach your retirement goals. They can help you establish a realistic savings rate based on your income, expenses, and desired retirement age.

Based on your financial situation and goals, a financial advisor can create a customized investment strategy and suggest specific retirement savings vehicles other than the 401(k), such as Individual Retirement Accounts (IRAs), stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), or other investment products. They can provide guidance on asset allocation and diversification and ensure the right percentage of distribution in each instrument. They can tell you when to buy or sell investments and help you stay on track. They can recommend cost-effective investment options, such as low-cost index funds, to minimize fees and maximize your investment returns over time. They can also help you select the most suitable options within your 401(k) and ensure you take advantage of any available employer matches.

The advisor can analyze your current portfolio and suggest potential adjustments if you already have investments. They can leverage their professional acumen to identify gaps, rebalance your portfolio if necessary, and ensure it remains aligned with your retirement objectives and risk appetite. Additionally, the professional can recommend income-generating options other than your primary salary to boost your retirement savings. This can involve part-time work, starting a small business, and others.

Lastly, a financial advisor can regularly review your investment portfolio and make adjustments according to market fluctuations, economic changes, or major life events to ensure your investments remain aligned with your evolving retirement goals.

What else can you do if you have fewer retirement savings?

Here are some other things that can help you accumulate enough savings for retirement:

1. Increase your savings rate by curbing on certain expenses

It is important to increase your savings rate by allocating a higher percentage of your income toward retirement savings. You may need to cut back on unnecessary expenses, such as dining out, entertainment, travel, etc., and redirect these funds into your retirement accounts, such as the 401(k), IRA, and others. You can consider automating your savings by setting up regular contributions from your paycheck or bank account. This can ensure better consistency and avoid delays or lapses that can cost you in retirement later.

2. Consider living more frugally

It may be essential to adopt a frugal lifestyle at this point. You can make a conscious choice to prioritize saving over spending. To do this, you mustwould have to evaluate your needs versus wants and find ways to reduce expenses. For instance, you may have to consider downsizing your living arrangements, such as moving to a smaller home, getting rid of your car, minimizing luxury purchases, finding cost-effective alternatives for everyday expenses, etc.

3. Find and invest in suitable investments

Investment can offer your money the potential to grow. If you have the capacity, consider allocating a larger portion of your savings towards investments. You can consult with a financial advisor to develop an investment strategy that aligns with your risk tolerance and time horizon. For instance, you can invest in a combination of stocks and fixed-income securities to build your retirement nest egg. This can help you beat inflation.

4. Maximize your retirement contributions 

Maximizing your retirement contributions to tax-advantaged retirement accounts, such as employer-sponsored plans like 401(k)s, IRAs, etc., can be critical at this point. Make sure to contribute up to the maximum permissible limit for the year to unlock potential tax benefits and tax-deferred or tax-free growth. When you are 50 or older, you canare eligible to make additional catch-up contributions to an IRA and a 401(k). These catch-up contributions allow you to contribute more than the standard annual limits. For example, in 2023, individuals aged 50 or older can make an extra $1,000 catch-up contribution to an IRA and an additional $7,500 catch-up contribution to a 401(k) or similar employer-sponsored plan. If your employer offers a matching contribution to your retirement account, you can get a higher match with the catch-up contributions.

You can also consider converting a Traditional account to a Roth account. A Roth account can offer tax-free growth and tax-free withdrawals in retirement, which can help you save money in retirement.

5. Consider delaying your retirement

Extending your working years allows you to continue earning income, save more, invest more, and potentially increase your Social Security benefits. It also provides you with a longer period for your existing savings to grow and reduces the number of years you will need to rely on your retirement savings.

6. Explore ways to reduce your debt 

It is vital to prioritize paying off high-interest debt, such as credit card debt or mortgage. High-interest debt can significantly hinder your ability to save for retirement. Make sure to focus on reducing and eliminating these debts as quickly as possible. This will free up more of your income for retirement savings while reducing financial stress.

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Other frequently asked retirement planning questions answered

 

1. How much money should my 401(k) have?

There is no one size fits all approach to retirement planning. Looking for a universal figure may or may not prove to be right for you. Therefore, it may be better to adopt a different approach that is tailored to your income, age, lifestyle, and financial needs and goals.

Consider the following benchmarks given below:

a. By the time you reach 30 years old, aim to have an amount equal to your annual salary saved up. For instance, if you earn $50,000 per year, your target should be $50,000 in retirement savings.

b. By 40, you can work towards accumulating three times your annual salary. So, as per the example shared above, you should now have approximately $150,000 in your 401(k) retirement account if you have not received an increment in your salary. However, say you currently earn $60,000 per year, in that case, you must have $180,000 in your 401(k).

c. As you approach 50, you must strive for six times your salary stowed away.

d. By the time you reach 60, the goal is to have eight times your annual salary saved.

e. Finally, at age 67, your total savings target should be ten times your current annual salary. For instance, if you earn $75,000 per year, the objective would be to have $750,000 in retirement savings.

Again, these are general guidelines that can help you gauge your progress and plan effectively for a secure retirement. However, this is not an established rule. Another common suggestion for retirement savings is to aim to save at least 80% of your pre-retirement salary to maintain your standard of living during retirement. If you earn approximately $70,000 per year before retirement, aiming for 80% of that amount would mean targeting $56,000 per year during your retirement years.

2. How much will my 401k pay me per month?

Based on the figures mentioned above, you can divide the annual amount of $56,000 by 12 to get the monthly payment. In this example, the monthly payment would be approximately $56,000/ 12 = $4,667. However, in reality, this may differ depending on the distribution options available to you and the age at which you start taking withdrawals. For instance, if you have a Traditional 401(k) account, you would have to start taking Required Mandatory Distributions (RMDs) from the age of 73 years (as of 2023). This money will also be taxed, depending on your overall taxable income for the year and the prevailing tax slabs. Additionally, early withdrawals before the age of 59.5 years may be subject to penalties. On the other hand, if you have a Roth 401(k) account, you can choose not to take out your money. You can also choose to decide the amount you wish to withdraw. For instance, some months, you may not need as much money, so you can let your money lie in the account. This will allow it to grow, and your tax liability will also reduce.

3. Can I retire with $1 million?

$1 million is often considered a substantial amount for a retirement nest egg. But your chosen retirement lifestyle will play a role in deciding whether this sum is adequate for you or not. If you aspire to indulge in extensive travel and luxurious accommodations, lots of socializing, living in an expensive city with a high cost of living or a state with high taxes, etc., your $1 million will deplete more rapidly compared to living a more modest lifestyle.

The duration that your $1 million will last hinges on several factors. The age you retire, how long you live, your health status, your financial safety nets like insurance, inflation, and others will cumulatively decide your retirement financial security. For instance, rising prices over time can diminish the purchasing power of your $1 million. If prices increase, your money will not stretch as far as it would have if prices remained stable. Consider a scenario where you require $40,000 annually to cover your basic living expenses. Without accounting for inflation, your one million dollars would last approximately 25 years. However, assuming an average annual inflation rate of 3%, the duration decreases to about 20 years. If you retire at the age of 65 and live on till 85, you may be able to live comfortably. However, if you retire at 630 and live till the age of 90, you may be left dependent on your children or be forced to shrink your lifestyle needs and live frugally.

When considering the adequacy of your $1 million retirement fund, you also need to account for emergencies. Your house's roof may cave in due to a natural disaster and require massive repairs, you may need additional funds for a medical concern if you do not have enough insurance coverage, and events like divorce can create financial burdens. It is also important to save for these unexpected and unplanned situations to ensure you have enough money to tackle diverse circumstances. 

To conclude

It is important to consult with a financial advisor for customized advice based on your specific circumstances and retirement goals. They can help you understand contribution limits, tax implications, and the most suitable retirement accounts for your situation. A financial advisor can also help you understand how and how much to save for your future needs. In the case of any shortfall, they can guide you and help you arrive at your preferred targets. They can also help avoid any errors that can deter your financial growth at such a crucial time.

If you are wondering how much 401k money you should have to retire,  it can help to hire a financial advisor and clear your doubts. Use the free advisor match service to find a financial advisor near you. Answer some simple questions about your financial needs, and our matching tool will connect you with 1-3 advisors who can best fulfill your financial requirements.