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Are You Saving Enough? 401(k) Balances by Age Revealed!
00:50:16
How Does Your 401k Stack Up To Your Peers?
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- [00:00]
Brian Preston
Average 401k by age 2025.
- [00:11]
Bo Hanson
Brian, I am so excited. This is one of our favorite shows that we get to do every single year because if we're going to be honest, we love 401ks.
- [00:22]
Brian Preston
Well, I mean there's so much to love about 401ks. We think about millionaires. This you can't. I got to tell you, the majority of millionaires I meet, they have very large 4:1ks despite what social media says. But there's actually some benefits that are tangible on 401ks that we should cover.
- [00:39]
Bo Hanson
That's exactly right. Some of the benefits are, number one, they are tax advantaged. Meaning that when you put money into your 401k, you can either save money on your taxes today or you can save money on your taxes in the future. It's one of the legally best ways to hide money from Uncle Sam.
- [00:57]
Brian Preston
And number two, get that free money. Money.
- [01:00]
Bo Hanson
I love it. It's not just this kind of stuff, but it's also the behavioral stuff that people love about 401ks. Brian, you say this all the time. One of the best ways that someone can set themselves up for success with their 401k is just by doing it. Because as soon as you enroll, as soon as you opt in, you automate your financial life to start building for the future.
- [01:18]
Brian Preston
Well, I mean, and don't, don't sleep on the 50 to 100% guaranteed rate of return. And I like the automation because it actually makes the good habits that much easier automatic for the people. If you can already just set up every month without you thinking about it, you're going to be putting money towards the future. How do you go wrong when things like that are set up?
- [01:39]
Bo Hanson
And when you do this, when you're doing in your 401k, it naturally puts you in the position to pay yourself first. If you are saying okay out of every single paycheck, I just want X dollars or X percent to go into my financial future. And it's really, really, really hard to screw that up.
- [01:54]
Brian Preston
And then the last thing I was, you know, we just want to make a point on buy and hold. I mean, if you typically look at the behavior of the average investor, people are such emotional creatures that they jump in and out with market volatility. Well, here we are with a 4.1k which already restricts your access until you reach retirement age or should restrict it. It's going to be a kind of a volatility shock absorber. It's going to allow you to actually buy into these volatile markets have the incentive to stay consistent. And it's going to help you with that buy and hold behavior that creates success.
- [02:26]
Bo Hanson
Now, what I love about it is most people have access to this when they start their very first job, when they start out at the very beginning of their career. What's beautiful is that the earlier you start, the younger you are. When you begin this, the easier the work of building wealth becomes, the less that you actually have to save on your path to financial independence. If you think about this, a 20 year old that wants to be a millionaire only has to save $95 a month to do that. But if you wait until you're 50 before you start taking it seriously and you want to be a millionaire, by the time that you retire, you have to save over $3,100 a month just to get to that same million.
- [03:05]
Brian Preston
Well, the thing that I love is if when you look at this visually is that for the 20 year old who starts saving and investing, by the time they reach retirement, there's a good chance that 95% of their account value will be your army of dollar bills doing all the heavy lift, meaning the growth and the income of the account. If you're a person who starts in your 30s, it's okay, you're still 86% of the account value is likely the growth in income. Even for somebody who starts out and says, well, you know what, I'm just now finding the money got shown, I'm in my 40s, what does that mean for me? A 40 year old can start out from zero and still by retirement, 68% can be coming from the growth of your assets and your investments. So don't sleep on that. We tell you time is going to be the powerful component that maximizes all the compounding growth that is coming your way to let your money work harder than you can with your back, your brain and even your hands, you know.
- [03:59]
Bo Hanson
I'm saying, okay, guys, guys, guys, I hear you and I love this, but I don't actually have access technically to a 401k, well, that's okay. Everything we're going to talk about today is going to be translatable across additional retirement accounts. If you're someone who potentially is like a teacher or in the medical field or a governmental worker, you might have access to maybe like a 403B or maybe you might even have access to a 457 or you might be a government employee and you get to participate in the tsp, the Thrift Savings Plan. So everything we're going to talk about today if you have access to one of those types of plans, these facts also apply. But it's not just for folks who only have employers. Brian.
- [04:43]
Brian Preston
Yeah, well, I mean every one of those plans you just laid out, the 43B 457 tsp, they still kind of are structured where they let you save at lump sum. But in the past, self employed individuals, beau had to go a different track.
- [04:55]
Bo Hanson
That's right.
- [04:55]
Brian Preston
And the government had set up where you could do like SEP iras, simple iras. And you always felt like a second class saving citizen. If you were self employed you're like, I wish I had more of the tools that the corporate America has what they're using for saving for their employees. Guess what? At some point, I mean it hasn't been around that long, but it's been around long enough that the Solo 401K allows entrepreneurs and anybody who's got side hustle income or self employment income, you now have the opportunity to create something that's actually better than the corporate structure. And the fact that the government has structured this where all that annual compliance testing and tax filing until your account gets to a certain size, it's out of here.
- [05:37]
Bo Hanson
That's right.
- [05:37]
Brian Preston
You don't have to do it. So Solo 401ks are great retirement vehicles too.
- [05:42]
Bo Hanson
All right, so we love 401ks and we love how powerful they are. We've already laid out the advantages that exist there. Now let's shift. Let's start talking about the numbers. Let's start talking about, okay, how does the average American use this tool and where are they at? And what's wonderful is Fidelity did a huge study and they're one of the largest 401k providers in the world. So when we think about who has access to data and access to information, Fidelity would be that group. And what's amazing is they went and looked at all the different plans they managed and all the different 401ks that they have access to and they were able to break it out by age. What's the average 401k balance for participant inside of a fidelity 401k plan? And this is what we found, that for 20 year olds, those who are 20 years of age, average 401k balance right now is about $4,400. For 25 year olds, the average 401k balance a little over $15,600. And for 30 year olds, the average 401k Balance about $35,000. Ron, are these numbers impressive? Not impressive. You like these?
- [06:50]
Brian Preston
No, I mean. I mean, look, this is the decade to get serious about this, because your 20s is the decade you should be investing in. Building assets, not liabilities is because I got to tell you, it troubles me that you're a billionaire of time at this age, and yet people are not even reaching a savings rate. And here's a stat that will freak you out. I put this in conjunction with when we get data from the government that shows that really people only have assets in two places, their home. And then now it's starting to make me think only in their employer provided 401k. Because we find out that half of Americans report never having invested outside of their 401k, meaning that this is it. You know, you basically got your house, and then you. Probably because you didn't want to miss out on that free money from your employer, we want you to go beyond that. And that's why I love that we get to do content to get you outside of that so you can maximize every dollar that comes into your army of dollar bills.
- [07:49]
Bo Hanson
Yeah, we know if you're a financial mutant and you've been following the financial order bracket, you know, the financial order corporations, not only are you going to take advantage of your 401k, but you're also going to be using HSAs and Roth IRAs and other types of investment vehicles. So what we want to compare for you is where should you be? Where should your liquid net worth be when you look at all of your investments, not just your 401k? And we want to compare that to the 50% of Americans who only have access to a 401k. And so you may be asking the question, well, how much do I need? And ultimately, the answer is, it depends. It depends on your unique situation. But what we want to do is we want to give you some. Some mile markers, some posts to kind of walk you through where you should be on your journey. And we know, we've shared this on the show with Ton, that by the time that you're 30 years old, we say that we want you to have about one times your annual salary saved up. And I think that's pretty common knowledge. I think Fidelity agrees with that. We agree with that. I think it's not an incredibly difficult thing for most folks to do by the time they get to age 30.
- [08:55]
Brian Preston
So with that, if you put that context in there, we showed that the Fidelity data was around 30,000, a little over $30,000. And we know the median income is over 50,000. There seems to Be somewhat of a disconnect there.
- [09:10]
Bo Hanson
So we know if we want to start at age 30 with about 1 times our salary and ultimately if we're trying to work towards age 65, a traditional retirement, we want to be able to replace 80% of our pre retirement income with a 4% withdrawal rate. Our goal by the time that we get to financial independence, we get to retirement would probably be somewhere around 20 times our annual salary. So we got to figure out how do we go from one times our salary at age 30 to 20 times our salary at age 65. What's, what are the mile markers? What are the marks we ought to hit? So if we think about folks in their 20s, we know that right now the median income for someone in their 20s is about 54,000, almost $55,000 a year. Well, if you remember, the average 401k for someone 20 is about. Someone who's 20 is about $4,400. At 25, it's about 15,600. Brian, you just alluded to this. The average 401k balance is about $35,000. If you're going to be a financial mutant, you want to hit the money guy mile marker. We actually want your total investment net worth to equal one times your annual income. And if you're just an immediate income earner in this cut, that means that you should have about $55,000 in savings and investments by the time you get to age 30.
- [10:26]
Brian Preston
Well, and that's what I want 20 year olds to know. It's okay if you're aspirational. You know, we tell you we love for your savings rate to be 25% but we understand when you're just starting out, it's okay if you're just doing 5% initially just so you get that employer match or 6% to get load up on the employer match from your 401k. Just do something that's right. Because a little is going to go a long way. And that's why we wanted to bring it Back to. If 20 year olds are feeling like they watch this content and they feel like they're a little behind, how can they catch up? We ought to give them what they can focus on.
- [10:56]
Bo Hanson
Yeah. So what are the things that really ought to consume your attention? Well, in your 20s, we really think it's mostly about behavior. Are you beginning to build and establish the good habits that are going to carry you through the rest of your financial life? And the, the first one seems so common sense and yet so many people miss this. Are you living below your means, are you making sure that whatever you have coming in is more than you have going out? If you're not at least doing that, you're missing out on the very first ingredient of wealth creation.
- [11:28]
Brian Preston
Well, it's discipline. I mean, that's one of the things. If you can, I'll go ahead and tell you. When we work with clients, prospects come our way and we work with clients, you see an abundance of people who have made really good disciplined decisions throughout their entire financial life. If you're constantly running up credit card debt, if you're constantly just making minimum payments, you're never ever going to get ahead. So I just want to be, I want to give you that stark honest truth so that you can start living that disciplined life and figure out how do you create margin in your life so your money can actually start working and giving it that third component, which is the time to build upon it.
- [12:02]
Bo Hanson
I love it. You just said it. So most people, they don't live below their means. They do exactly what you said, they start getting in debt. So if you're in your 20s, you're trying to think about what are the things I should focus on? Number one is don't allow your debt to begin accumulating. A lot of folks have to graduate student loan debt. It's a new reality for our graduates coming out. What we don't want you to do is come out of school and start your career and have student loan debt, and then you start adding the auto debt, and then you start adding the credit card debt, and then you start adding the consumer debt. And all of a sudden you recognize in this decade when you should have been building assets, all you were doing was digging a hole that got deeper and deeper and deeper. So in your 20s, you want to make sure you're not falling into that trap.
- [12:42]
Brian Preston
And that leads right into measure twice on large purchases. This is because you don't want to make a mistake on. I see it all the time. You know, you graduate with college, you feel like, you know, maybe you grew up in humble beginnings. You reward yourself with that brand new car payment. And I see, I mean, we see average American now doing close to 66 months on financing payments over $700. Guys don't go fall into that consumption trap. Measure twice on those large purchases because you do not want to be driving your wealth around. So you want to have it in the net worth statement.
- [13:14]
Bo Hanson
Yeah. In your 20s, we said, okay, don't live beyond your means, don't go into debt, don't screw up the large purchases. How about one do? Here's a big do to focus on your 20s do. Start saving and investing, even if it's small, even if it seems insignificant. What's amazing about your 20s, that even small, insignificant numbers when applied through time can become incredibly significant. That's why, Brian, we even come up with this idea, this concept called the wealth multiplier.
- [13:44]
Brian Preston
Yeah, if you think about it, for a 20 year old, every dollar that comes into your control has the opportunity to become $88 by retirement. But here's the thing, that excitement, it can also be something that cuts the other way. By 30. You see every dollar has potential to be $23. Still really exciting stuff. But notice by the time you're 47, so a seven fold increase is still important. But by the time you get to my age, now you're getting below $3. This is why time can be your friend or it can be your foe. Make sure you go download moneyguy.com resources, our wealth multiplier, to make sure you're on the right side of this.
- [14:20]
Bo Hanson
All right, so we're Talking about the 401k and how powerful it can be. So for Those in your 20s, what are the things as it relates to your 401k that you should really be familiar with, that you should really understand? And we think that there's three of them. Number one is your match. Number two is your contributions or what you're putting into the plan. And number three is your investment. So let's talk about the first one first. Brian, let's talk about the match because this is one I know that gets you super, super excited.
- [14:46]
Brian Preston
Yeah, this is, and I've already alluded to it, I got, I even my excitement got a hell too much and overwhelmed me in the fact that I burst it out with, you have to love the free money. Yes. Your employer is incentivized to give you matching or profit sharing or even just you don't even have to put money in, they just put money into your plan. So they get to do even more options with their plan for themselves. Don't sleep on the free money. That is so powerful. That's why it's number two in our financial order of operations.
- [15:16]
Bo Hanson
And would you believe that right now the average employer contribution 4.7%. So if you're someone who's just taking advantage of the match, just putting money into your plan, there's a good chance that your employer is putting nearly 5% in there on your behalf. And this is on, this is often structured as like a dollar for dollar match. If you put in $1, your employer will put in $1. Or maybe it's a 50% match that if you put in 6% of your salary, they'll put in 3%. Either way, you can think about this like a 50% or 100% rate of return on your dollar. So if you're not taking advantage of, if you're leaving money on the table, you are literally walking away from free money. You already alluded to this, Brian. There's, there's a few different types of ways that your employer can put money into the account. We just talked about this one. It's matching. It's where you have some skin in the game. And your employer says, okay, if you've got skin in the game, I'll put money in also. But that's not the only type of contribution.
- [16:17]
Brian Preston
Yeah, we also have non elective. A lot of people are, you know, if you think about it, it's not uncommon to see safe harbor 401ks. Well, safe harbors give really big flexibility to your employer if they just load you up with the money very early. On some plans you have to put nothing in so you can do non elective contributions. That means that even if you don't contribute, they'll put money into your plan.
- [16:40]
Bo Hanson
And then there's also profit sharing contributions where the employer says, okay, in addition to the matching or addition to the safe harbor, maybe the firm, the company, the enterprise is doing well. So we want you to share in a portion of that. So we're going to put in additional contributions on your behalf. We have one plan, Brian, that is so generous that if you as a participant put in 5% of your pay, you actually get a total of 15% going in on your behalf across the matching, contributions and profit sharing. So you need to understand all the different ways that your employer can put money into the plan. But then you also need to understand how do you put money into the plan? What do your contributions look like? And this is generally broken down into two different pieces. Number one, how much do you contribute? Number two, where does my contribution actually go? What part of the plan do I actually put my dollars into?
- [17:31]
Brian Preston
Now this next one, this I got excited and I would just go ahead and reveal it for you. We looked into it because Fidelity once again was tracking all this data. The average contribution across all ages for four 1ks according to fidelity is 14.1%.
- [17:47]
Bo Hanson
Amazing. We're like 10% off of our 25% goal.
- [17:50]
Brian Preston
But stop. You can't have A celebration on this because remember we showed you just a few slides ago, employers are putting in close to 5%. So if you actually. And by the way, this number 14.1% does include the employer contribution. That means the typical American is actually putting in less than 10%. Now, we all want a retirement, we all want to own our time, but yet we're not willing to put in the effort of actually going beyond that 9%. We can do better than that.
- [18:19]
Bo Hanson
And there is some silver lining here. We actually know that 39% of people increase their contribution rate over the past year. So folks are getting better at saving and we want you to do that. But remember, we don't want you to get your order out of line. Brian, can you hold that thing up? Again? If you have high interest debt, we don't want you focusing on the 401k yet. If you have not fully built an emergency fund, we don't want you focusing on the 401k. If you've not fully maxed out your Roth IRAs, your HSAs, we don't want you folks in the 401k. But if you are in step six and you are following the financial order of operations, this is the great time for you to begin thinking about, okay, how can I start contributing? How can I get better? Maybe I can't do 25% right out of the gate, but maybe I can start at 10% and next year I can go to 11 and the next year I can go to 12 and I can slowly through time increase it and ultimately work towards that 25% goal.
- [19:17]
Brian Preston
I mean, just, it's okay if you start with just your employer match. It's just as you get pay raises as you start, as your income goes up, try to do more. I mean, that's the thing is I encourage people, as life happens, as you have more success, make sure that you're also updating those 401k contributions so that it is expanding as well so you're just not stuck at that original 5 to 6% that you set up once you lined up your first 401k.
- [19:44]
Bo Hanson
So that's your contributions in terms of how much you contribute. The other thing you have to think about is which account do I contribute to which side of the equation? Because 401ks generally come in two varieties. You can do a pre tax 401k where you put money in today and you get a tax benefit today. And when you pull it out in retirement, you pay taxes or you can put it in on the Roth side I don't get a current year tax benefit, but the dollars will grow tax deferred. And then if I pull them out for qualified reasons or qualified circumstances later on in retirement, I can actually pull them out completely tax free. So the question becomes how do I decide? How do I know if I do pre tax or Roth?
- [20:22]
Brian Preston
There's several things that go into this. Obviously your age, you know this, I will tell you, the younger you are and the more time you can let your money work, that is going to lean towards becoming tax free growth like a Roth account. But we also put an income component to it as well. Because if you're starting out and you're not in your peak earning years, more than likely your tax rate is under 25%. Under 25% tax rate lends itself to being Roth friendly. Meaning that wouldn't it be great if you could pay really low taxes right now, let that money compound completely tax free to take advantage of it? I should probably get in and enjoy and maximize that. However, if you're somebody and your income starts going up and your marginal rate, both your federal as well as your local state that you pay income taxes, if you add up what the margin next dollar tax for each one of those, that's your marginal tax rate and it's between 25 and 30%, that's where those other elements like your age and your goals are definitely going to start leaning into Do I? Because like for a 25 year old who's in the 26% bracket, you probably, hey, that's going to. You might want to go into Roth because you're young, but if you're somebody who's 60 years of age, you might want to lean towards more of the traditional because you'll have opportunities once you quit working working to do Roth conversions or something. And if you're in the high income situation and your combined marginal rate is greater than 30%, we think that there's potential down the road for you to take the tax deduction now and then later on once you lose all your earned income, have an opportunity to do Roth conversions or even at least have the opportunity to pay a lower tax rate. So it makes more sense. Take advantage of the arbitrage of, you know, take the tax deduction now and then we'll figure it out once you get closer to retirement.
- [22:09]
C
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- [22:38]
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- [23:09]
Bo Hanson
Of, we're talking about the things you need to know about 401ks. We covered that. You need to know about your match, you need to know about your contributions. The other thing we want you to know is about your investments. A lot of times, and it's super sad when we see this, someone won't take an active role in at least making the election their 401k. So if you're someone in your 20s or your 30s and you're just letting your plan default to the cash option or the stable value option, there's a really good chance that you are missing out on a huge opportunity. Remember, we've already shared the wealth multiplier would suggest that for a 20 year old $1 has the ability to turn into $88. Well that assumes that that $1 is invested that that $1 is working for. If you have it sitting in a money market or a cash equivalent, that $1 is not going to turn into 88. So you don't have to make this more complicated than it is. A lot of plans have really good low cost target retirement index funds where all you have to do is decide two things. How much can I save? When do I want to retire? When do I think I'm going to need this money? If you can just answer those two questions, you can set it and forget it and let your dollars start growing through time.
- [24:16]
Brian Preston
Yeah, in your 20s I want you, because you're not supposed to touch this money for decades in the future we want you to be more aggressive. Don't let it, don't let the volatility of the news media scare you into being super conservative or going cash only. Consider looking at what the long term investment opportunity is and be somewhat aggressive with it.
- [24:34]
Bo Hanson
All right, Brian, now let's Talk about the 30s again. Fidelity did this huge survey looking at average 401k balances broken down by age. And according to Fidelity, for Those that are 30, the average 401k balance is just under about $35,000 a year. By the time that you get to age 35, the average 401k balance in this country is about $59,000 per year. And for the average 40 year old right now, the average 401k balance is about $91,000 per year. And so the question becomes, if I'm in my 30s, if I might be in that messy middle stage, is that how much I should have or where should I be or what should my numbers look?
- [25:15]
Brian Preston
Yeah, let's. You know, it's great that we actually have pulled up and we have a great guidance here because we shared earlier that when you're 30 years of age, you know, we say it, Fidelity says it, one times your earnings is probably a good aspirational goal to shoot for by the time you enter into becoming a 40 year old. You know, as you're graduating from 39 to 40, we'd like it to be three times your income. There is a transition as your money starts growing and building. So we could actually put numbers if we knew what the median income was for typical workers.
- [25:46]
Bo Hanson
So what you're thinking here is, okay, I got to go from one times to three times. I think that's a lot. I got to triple. I got to triple what's going on. So if we know that the median income for someone in the 30s right now is about $86,000. What are those money guy markers? What are those mile markers that we ought to be hitting? Well, remember we said that the average 30 year old 401k balance is about $35,000. But we think that your total investable net worth should be closer to 55,000. That was the median income for a 30 year old. Well, by the time that you get to 35, we think that your total invested assets should be about $146,000. And by the time you end your 30s, you should have an average liquid net worth. Your liquid net worth should be about three times your annual income. And if we're just going to use the median income of Americans in their 30s of $85,000, that means that your investment portfolio should be a little over a quarter of a million dollars, right at $257,000. So average Americans are not quite aligning with our Financial means.
- [26:49]
Brian Preston
Well, I think people are going to see this is, they're going to immediately yell at the screen, this is where you lost me. Because they see us go from $55,000 for a 30 year old to somehow 257,000 by the time you reach 40. Guys, I'll go and tell you this is the power of compounding growth. You don't have to do this alone. This is not only you putting the money in there, this is about your army of dollars actually putting some money and growing upon itself over time. We have a great case study or example to show you. This might be a lot easier so that you're not stuck like the typical American, avoiding and sticking your head in the sand. You're actually getting in there, getting the money, working and letting your compounding army of dollar bills do all the heavy lift as well.
- [27:29]
Bo Hanson
Yeah, if you think about that 50, nearly $55,000 that you would have had at the end of your twenties, if you just let that grow at eight and a half percent without adding another dollar to it, just letting those dollars grow, it would grow from $55,000 at age 30 all the way to $128,000 by age is you are halfway to where you're supposed to. Just the dollars that you saved in your 20s got you halfway there. That means that you would only need to have about a 10% savings rate in order to save that additional 50%. Now, we're not suggesting that you drop your savings rate. What we are showing is that if you do the hard work early on, you let your army of dollar bills start working for you, the path gets easier and easier and easier. Now likely in your 30s. We talk about it all the time. This is the messy middle. This is when life begins to pull you in a thousand different directions. That's why we want you shooting for 25%. But if you did what you were supposed to do before you got to the messy middle, there's a good chance you're going to have freedom and flexibility to navigate the messy middle different than your peers.
- [28:36]
Brian Preston
But we've looked into the data and the research shows that the typical American doesn't start saving and investing until age 33.
- [28:42]
Bo Hanson
That's right.
- [28:43]
Brian Preston
So we've just shown you, if you could come into this whole investment at age 30 with this sum of money, it has the chance to double upon itself over the decade. This is not going to get easier if you stick your head in the sand and defer this. I would encourage you. If you're like the typical American and you're 33 years of age, you're just now discovering this, you can still do it. Your compounding opportunity is massive. But it's not going to get easier. Every day you delay this is going to get harder and harder to. So make sure you start putting money to work. Go beyond the American 9%. Let's get it up to the 25% that we talk about all the time on the Money Guy show. There's a reason we want to reach, help you reach your success.
- [29:25]
Bo Hanson
So what are the things that we ought to focus on in our 30s? Well, the first one is we really ought to focus on optimizing. And one of the number one most powerful, most impactful, most important things that you can optimize in your 30s is actually reaching that 25% savings rate. Maybe you don't start there at 30, maybe you're only at 15%, maybe you're only at 18%. But if you can focus on the optimization and focus on getting to 25% as quickly as you can, you will be amazed at how powerful those dollars can be for you.
- [30:00]
Brian Preston
It's also important. This is the age you've probably gotten a few promotions, your income's going up. You know, we shared in the 20s that this is where you know you might be in a lower tax bracket. It makes sense for Roth. Don't sleep on the fact that you probably need to reassess the Roth versus traditional ira. As your income tax rates go up, as your earnings go up, make sure you're staying on top of all that.
- [30:20]
Bo Hanson
And then the third thing that we want you to focus on, and this is specifically as it relates to your 401k, is we want you to understand your vesting schedule. Now there's a good chance a lot of people change jobs in their 20s and, and even in your early 30s, there's a chance that you still might change jobs, change career paths. But you've likely been working and building and you've likely got some dollars that your employer has put into your 401k on your behalf. And you want to make sure before you make a job change, you weigh the cost, the all in costs of making that decision. And one of the things that employers are able to do in order to incentivize you to stay with them is they can add a vesting schedule to contributions that they put into the plan, which means that it might not all be yours day one. There are a few different types of vesting schedules that we see now, Brian, you mentioned earlier talk about Safe harbor contributions. These are contributions that the employer puts in automatically, oftentimes whether you put money in or don't put money in. Most of the time these are 100% vest and not every time you want to check your plan document because these can have a vesting schedule over a certain amount of time. But most often These contributions are 100 vested.
- [31:34]
Brian Preston
So that's important. Pay attention. You'll like the word safe harbor. The next thing is cliff investing. This means that you basically go from zero percent to a hundred percent, but over a certain period of time, and it's a shorter period of time. That's why they, they people will do vest, you know, Cliff vesting if they, you know, after two years you go from 0 to 100%. But what's more popular is Bo, what's called graded investing. And this is where you'll see every year you pick up an additional 20% more vesting. So typically after you know, five years of being there, you know, in six years you're fully invested, you know, vested in the funding from your employer. Understand this verbiage, understand how this impacts you, because it's going to be very important to know how much money you get to keep, but also your career and employment decisions to see if you don't make a bad decision in that, in that decision matrix.
- [32:24]
Bo Hanson
Yeah. When you change jobs, there are other costs associated than just the salary that you're losing. So you want to make sure again, you measure twice, cut once when it comes to making those decisions. All right, so now let's talk about the 40s, Brian.
- [32:39]
Brian Preston
Yeah, 40s are important because this is, you know, if you're, you're either going to be bitter because you've missed out on what compounding growth, or this is going to be where you start celebrating that your money is starting to grow upon itself exponentially easier, making the work less hard for you in the future.
- [32:57]
Bo Hanson
So when we think about average 401k balances, again, this is a study done by Fidelity investments. In the fourth quarter of 2024, the average 401k balance for a 40 year old in this country right now is about $91,000. For a 45 year old, the average 401k balance is about 131,000. And by the end of the 40s, by age 50, the average 401k balance for an American in this country is about $176,000. So Brian, as you're thinking about this as approaching 50 is approaching that mile marker, do you think 176 is where most people probably should be.
- [33:34]
Brian Preston
No, I mean, because this is. I mean, retirement's right around the corner at this point. You're hoping that you can replace not months, but literally years of your life. Your money needs to work harder than you can. And people are quickly. I mean, you're celebrating that you're six figures because you're like, yeah, that would be a nice car, that'd be a nice house. But no, you need to be thinking, no, I need an enterprise value of assets that's going to replace my labor. I don't know that that gets it done.
- [34:01]
Bo Hanson
So when you're thinking about your money guy mile markers, we know that at age 30, we wanted to have one times our annual salary. At age 40, we want to have three times. And we're ultimately working towards 20 times our annual salary for financial independence. If you're looking for the mile marker where you ought to be at age 50 across all of your investable liquid wealth, we want you to be at 6.4 times your annual salary. So if we take the median salary for Those in their 40s in this country right now, it's about $101,000. So by that metric, if you are the median income earner, where the average American has about $91,000 in their port, in their 401k at age 40, we said to have three times the median income at age 30, you want to have about 257,000. So now as we get into our 40s, we work through our 40s, the average 45 year old has a 401k balance of about 130,000. If you're following the money guy mile markers, we actually want your total portfolio to be worth about 5, 445,000. And by the time you get to age 50, where the average 50 year old in this country has a 401k with about $176,000 in it, we think that you should be shooting for about 6.4 times your income, which for the median income earner would be about $650,000.
- [35:21]
Brian Preston
Well, you can see how the separation. Remember earlier I said it's a fork in the road moment. Think about for our financial mutants. You come into your 40s with 257,000 or maybe more. If you've really thrown it out there and you're like, watch what happens when this money grows upon itself. Because when I see a number of we're trying to go from 257 to $648,000 in a decade, that's wild. Growth. But then when I back into and have the context of understanding that if I just had the 257,000, by the time I get to 50 years of age, it likely has grown to 543,000.
- [35:58]
Bo Hanson
Without saving another dimension.
- [36:00]
Brian Preston
And then that means, wait a minute, my savings rate only has to be like 7% and I've still reached the goal. This is why, and I tell you, a lot of you are going to watch this and you'll be behind. Use that as motivation because it doesn't mean that your situation's dire. It just means you have a little bit more work you need to do on increasing your savings and investment rates so you can catch this up. Because it's not going to get easier, it's going to get harder, is you're starting to lose less and less time for the money to grow and work upon itself.
- [36:29]
Bo Hanson
Now, what's beautiful about 401ks is that they're not all that complicated. We've covered a lot of the basics of our 20s and our 30s. So what do we begin to focus on in our 40s? What are the things that we begin to focus on? What are some of the nuances that may be available to us? One of the things we want you to do is as you get into your 40s, we want you to begin fine tuning your specific plan. I mean, we say all the time we want you saving 25% of your gross income. 25% of your gross income. But as your income changes and as your financial circumstances change, one of the questions we want you answering is, well, can I actually count the match? Can, can I count the money my employer is putting in? Is that part of my 25% or am I supposed to be doing 25% on my own? How do people answer that question?
- [37:17]
Brian Preston
Well, it depends on how close you are to the social safety net. So we've, we've gone ahead and defined, we've taken into account a lot of this. If you're a single individual, if you make over $100,000, you need to only count your funding. Don't count your employer match. If you make under 100, you can count the employer match. That's for single individuals. For married couples, $200,000. Like I said, it's all tied back to the social safety net. So pay attention to where you are from an income standpoint. If you're under, then embrace the fact that you get to count your employer. Use that as motivation to see if you can keep growing this thing even more.
- [37:52]
Bo Hanson
Again in your 40s. We want you fine tuning. So maybe this is your story. Maybe when you were in your 20s, you just got your employer match, you put in 5% and they put in 5%. Then you got to your 30s, said, you know, I'm going to double it, I'm going to start saving 10% of my salary. And you felt so great about that. But now you're in your 40s. One of the questions we want you asking at this stage of your life is can I actually max out my 401k? Can I actually go up to the governmental limits that they make available to me to put money in my 401k? And if you're in your 40s, if you're below 50 years of age in 20, 25 this year, you can actually defer $23,500 of your salary into your 401k. That's the maximum allowable amount the government's going to let you put in there to take advantage of that tax tax incentivized growth. So are you taking advantage of that or are you leaving some money, leaving some opportunity on the table?
- [38:44]
Brian Preston
I mean, we still want you prioritizing the Roth IRAs, the health savings accounts, because that's step number five, the financial order operations. The, the tax motivation is very powerful, but it is, I think by the time you're in your 40s, you're probably exceeding step five. And you're also in step six, which is hopefully having you max out your retirement options in your 401k.
- [39:03]
Bo Hanson
And then as you do that, Brian, you get into step seven, you get into hyper accumulation. And one of the questions we get all the time is okay, if I'm in hyper accumulation and I've maxed out my 401k, I've done my salary deferral, what comes next? What options are available to you after that?
- [39:18]
Brian Preston
I mean we always like in step seven, especially if you're one of these people that thinks you're going to need access before 55 for 401k, 59 and a half for all the retirement and other retirement accounts besides 457 by the way, that don't have those. But it is one of those things where you might want to have some taxable brokerage accounts. If you're also, if you're a really high income person and you have the right structured account, you might get excited about finding out that you have after tax contributions which can set up backdoor Roth conversions, mega backdoor Roth conversions, a lot of cool planning opportunities. So pay attention as you go beyond 25%, how do we need to structure those accounts to maximize all the tax benefits but also to reach you and use appropriately or best for you in retirement?
- [40:01]
Bo Hanson
Yeah, a lot of people don't realize, they think about when I put Money in my 401k, I can either do pre tax or Roth. They don't recognize there's actually a third contribution type called after tax contributions. And even though 23,500 is the most you can put into pre tax or the most you can put into Roth, in this third type of contribution bucket, you're not limited. You can actually take this all the way up to the section 415 limits of $70,000. So if you are a very high income individual or you do have an employer that has a very robust plan with after tax options, you between your contributions on salary deferral, between your employer safe harbor or profit sharing or matching contributions and after tax contributions, you might actually be able to get $70,000 a year into your 401k in a tax advantage manner. So you want to make sure as you're fine tuning and customizing your plan, you're asking the question, are these types of benefits available in my plan and if they are, are they something that I should be taking advantage of?
- [41:05]
Brian Preston
Yeah, really exciting stuff from, from an opportunity to, to plan beyond. Now, Bo, I want to pick on you because earlier you, you said when we got to 40s you kind of leaned in and I think that's just old habits because we, we, we, we've been creating content so long that you look at me as a 40 something year old.
- [41:20]
Bo Hanson
I still think about it.
- [41:21]
Brian Preston
However, I'm actually in my 50s now, so it's time to transition. What do 401ks look like for those in their 50s and 60s and, and even beyond?
- [41:31]
Bo Hanson
Yeah, so when we think about average 401k balance Again, Fidelity did a wonderful study in 2024 looking at the average 401k balance of folks by age. And we know that the average 50 year old has a 401k balance right now of about $176,000. The average 55 year old's 401k balance is about 222,000. 60 year old, it's about 246,000. And then for the average 65 year old in this country right now, their 401k balance alone is about $250,000. Now again, you know we said our ultimate goal is we're working towards having 20 times our annual income for financial independence when we check our mile markers if we're going to stay on this path. We know that we needed 6.4 times our income by 50. That would mean we need 13.7 times our income by 60 and then 20 times by 65. Well, if we know, Brian, that the median income for someone in their 50s is about $110,000 a year, the average American, at least by this metric, is falling drastically short.
- [42:37]
Brian Preston
Yeah, and that's why, I mean look at the, if we, if we pull up the chart of actually what the spread is between what the averages are versus what we're projecting, you should need get motivated. I mean, don't be part of the statistics of the average American. You want to be beyond average. And we showed how earlier on for 20 year olds, 30 year olds, just do something a little goes a long way. Still in your 40s, you have opportunities to catch up. And then the government has written into tax laws. In your 50s you get some incentives. So there's all kind of opportunities. Do something today. Don't let these numbers discourage you.
- [43:15]
Bo Hanson
Let it be motivation if you're a median income earner. Just for those of you out in podcast world, if you want to hit your number by 50, your total portfolio should be about 650,000. By 55, you should be into seven figure land, a little over a million $40,000. By age 60, about one and a half million dollars. And then by age 65, if you were a median income earner in this country, you should have 20 times your annual income, about $2.2 million saved up. So as you transition into this 50s and into 50s and beyond, what are the things that you ought to be thinking about, ought to be focusing on? Well, you just said it, Brian. This is the stage where retirement or financial independence is right on the corner. So you really ought to be focusing on landing the plane. What tweaks should I be making that would help me out?
- [43:59]
Brian Preston
Yeah, well, that's what the government is, as I already alluded to it, catch up contributions. You hit 50 is probably the only good thing that you feel better about yourself that you're now in your 50s, is you get catch up on your IRAs, you get catch ups on your four 1Ks. Don't sleep on these unique opportunities because we've already heard 23,500 is what the government says the max you can put into your 401k unless you're 50 or greater. And now you can do 31,000 if you're now. They even have this super easy, super catch up between 60 and 63, you can even contribute up to 34,750. That can actually make a big difference over the long term. So take advantage of those unique windows of time that the government is giving you. Hey, a little bit extra that you can put into the these plans.
- [44:44]
Bo Hanson
Dan, as you think about exiting the workforce or making this next decision on this next phase, are you familiar with the rule of 55? If I'm thinking about leaving in my 50s, should I potentially consider making sure that I do not retire, do not leave work before the year in which I turn 55? Because if I do it in the year that I turn 55 or later, I can actually access those 401k assets before age 59 and a half.
- [45:09]
Brian Preston
And then this is also a time where, you know, your allocation matters. You know, this is where we're going to pay attention to tax location, we're going to take, pay attention to asset location so you can actually have access to what, cash, when. So this is very important to understand. And plus, you, I don't want you to be a cowboy forever. I mean, there's a, there's a point where you need to dial down risk just because you don't have the time to recover. If you go too far out on the risk spectrum.
- [45:32]
Bo Hanson
And we want you, especially in this phase, we want you to measure twice, cut once, because it's not clear how many retirements you're going to have. You hope you only have to do it once, but you only get one shot at that. And it's really hard to get the water back up the hill once it's gone down the hill. So have you done the things necessary to make sure you're ready for this stage and ready for this transition? A great tool that you can use if you've not done this is have you gone to learn.moneyguy.com and done our know your number course? Do you understand okay? To live the life I want to live and the terms, I want to live it at the numbers I want to live it at. Have I hit my number? Have I reached the level where I can actually step away from the workforce and be okay? If you've not done this work yet, you might not be at the place where you can actually sign that retirement notice.
- [46:20]
Brian Preston
Well, I think the know your number course is perfect for really people 20 to 50 years of age because it lets you know if you're ahead of the curve, behind the curve, or right where you need to be. I will say is you actually are approaching retirement. I want you to consider even taking it to the next level. And that's where we, there's a reason if you go to moneyguy.com become a client, you'll see that we actually have a work with us section. You can, you know, watch a video on, you know, what value we think we offer clients. And this is the part where you know, humbly, I talk about the abundance cycle. We give you tons of free advice because I know in the beginning your decision should just be simple, is that just do something, make the money, work as hard as you do and you'll be rewarded in the long term. However, as you get more successful, the side effect of success is complications.
- [47:10]
Bo Hanson
That's right.
- [47:11]
Brian Preston
And you're going to. You've only had one retirement and you don't want to screw it up because you're now more than likely the CEO of a seven figure enterprise that you don't want to lose 20, 30% just because you had the wrong allocation. You don't want to pay extra taxes just because you didn't know that you could restructure it this way. All those blind spots are complications that we think are the perfect steps for why you probably want to take a relationship to the next level so that you can find somebody who's done hundreds, if not thousands of retirements for their, for their clients. So you know you're getting the best version of your retirement and maximizing your financial life. That's why go to moneyguy.com if you're in the beginning and go to our resources section. All the free stuff, but don't be scared to go to that work with us section because it is one of those things where you either need to own your financial life or if you just let it happen to you, it will own you. And that's why we want you to command your army of dollar bills. I'm your host, Brian Preston. Mr. Bo Hanson. Money Got Team out.
- [48:14]
Bo Hanson
The Money Guy show is hosted by Bryan Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment or legal advice. All investments involve a degree of risk, including the risk of loss.