Turned 40 and it just hit me… I need to build up my 401k… I have about 7k in it right now after one year at this company. I make about 60k a year and have no debt besides mortgage. I have a 3% match so if I bump it up to 10% of my salary will I be ok at age 67 or 27 more years? Should I panic or will I be sitting pretty at 67… I have been working my whole life.
First off, take a deep breath. You’re not alone in this boat, and it’s never too late to start getting your financial house in order. Let’s break this down.
The fact that you’ve realized you need to step up your retirement game is actually a good thing. Many people don’t even have this realization until it’s way too late.
Now, $7k in your 401k after one year isn’t terrible, but we definitely need to pump those numbers up. The good news is you’re making $60k with no debt besides a mortgage – that’s a solid foundation to work from.
Your company is offering a 3% match, which is literally free money. Always, always take the full match. Not taking it is like finding cash on the sidewalk and choosing to leave it there. Bumping your contribution up to 10% is a great start.
At your current salary, that’s about $6k a year. Add in the 3% match, and you’re looking at $7,800 annually. Not bad, but let’s aim higher.
With conservative estimates (7% annual return), you could have around $600k by retirement.
You asked if you’d be sitting pretty at 67. Well, let’s talk about the 4% rule. This rule of thumb suggests you can withdraw 4% of your retirement savings each year with a good chance of not running out of money. So if we assume you reach that $600k mark we calculated earlier (based on 7% returns over 27 years), that would give you about $24,000 a year to live on.
Now, $24,000 a year might not sound like much, but don’t forget about Social Security. As of 2024, the average Social Security benefit is about $1,800 a month, or $21,600 a year. Add that to your $24,000 from savings, and you’re looking at around $45,600 a year. That’s not exactly rolling in dough, but it’s not poverty either.
I’ve got one more crucial piece to add to this retirement puzzle.
You mentioned having a mortgage, and that brings up an important point. By the time you hit retirement age, one of your primary goals should be to have that mortgage paid off.
Here’s why this is a game-changer: Housing is typically the biggest expense in most people’s budgets. If you can eliminate that cost by the time you retire, you’re setting yourself up for a much more comfortable future.
Think about it. If your mortgage payment is, say, $1,500 a month, that’s $18,000 a year you won’t need to factor into your retirement income. Suddenly, that $45,600 we calculated earlier (combining your 401(k) withdrawals and Social Security) starts looking a lot more livable, doesn’t it?
This ties into the 4% rule and Social Security we discussed. If your biggest expense is already covered, you can stretch that 4% withdrawal rate much further. Plus, without a mortgage hanging over your head, you have more flexibility. Maybe you decide to downsize and free up even more cash. Or perhaps you use your home equity as a backup plan if you need it.
Here’s what I want you to do: Immediately increase your contribution to at least 15% – 20%. Yeah, it’ll sting a bit now, but future you will be doing a happy dance. Look for ways to increase your income. Can you negotiate a raise? Start a side hustle? Every extra dollar you can throw at retirement counts.
Consider opening a Roth IRA in addition to your 401k. Diversifying your retirement accounts can give you more flexibility and potential tax advantages. And don’t forget to review and optimize your expenses.
Remember, it’s not just about the numbers. It’s about creating a life you love now while also securing your future. You’ve got 27 years – that’s plenty of time to build wealth if you’re smart and consistent about it. So no, don’t panic. But do get fired up about taking control of your financial future. You’ve got this!