Is Maxing Out Your 401(k) Enough?

By Carrie Schwab-Pomerantz

March 7, 2018 7 min read

Dear Carrie, I'm turning 35 this year, and finally ready to start saving for retirement. If I contribute the maximum to my 401(k) every year, will I be OK? —A Reader

Dear Reader, First, congratulations. Making the first move can be the hardest of all, so I applaud your decision. Also, you ask an excellent and often overlooked question. It's understandable to assume that the government-allowed maximum 401(k) contribution would be sufficient. The reality, though, is that there's no magic number that works for everyone. To get an individual assessment, you have to look a little deeper.

With retirement 30-plus years out, this may seem like an impossible task. However, when you look at national statistics, it appears that on the average, retired households spend about 80 percent of what working households spend. This makes sense when you consider that some costs such as mortgage payments and work-related expenses may go down.

For example, when you are retired you'll also no longer be subject to Medicare and Social Security FICA taxes. On the other hand, expenses such as travel, entertainment and healthcare 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, less what you've been saving each year for retirement. That at least gives you something concrete to work with for planning purposes.

Let's start by assuming you're able to make the maximum yearly contribution of $18,500. Will that be 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 $20,000 in Social Security benefits. Your portfolio will need to generate the $60,000 difference.

An industry guideline commonly known as the "4 percent rule" 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, $60,000 x 25 equals $1.5 million. That's the amount you'll need to have saved on the day you retire. To get even more accurate, you should also consider the impact of inflation. That's because in 30 years $1.5 million won't have the same purchasing power that it has today.

Now pull out the financial calculator or use an online retirement calculator. For the sake of example, we'll assume an 8 percent return and 2 percent annual inflation. With these parameters, if you're starting from zero and want to retire in 30 years (when you're 65) with a $1.5 million inflation-adjusted portfolio, you'll need to sock away about $22,500 a year. In other words, saving the government max of $18,500 leaves you a little shy of your goal.

Here's where the value of an employer match can be significant. Many employers will match a portion of 401(k) contributions, in effect bumping up the yearly amount you save. For example, if you currently earn $80,000 a year, and your employer matches up to 5 percent of your salary, that could mean an additional $4,000 per year of savings. Add that to your personal contribution of $18,500, and you're right on target.

Of course, your situation may be very different. You may want to retire earlier (or later), your rate of return may be different, and inflation may be higher or lower. However, this gives you an idea of how to come up with an estimate.

At some point, though, it would be a good idea to have an in-depth conversation with a financial advisor. He or she can talk to you about your expectations and priorities, run different scenarios, and craft a personalized plan that can incorporate other planning issues such as budgeting, risk management, and estate planning.

Starting to save for retirement at your age, it's generally recommended that you sock away 15-20 percent of your yearly salary between you and your employer (thereby gradually increasing the amount you save as your wages increase) for the rest of your working years. If you wait, the percentage will go up accordingly. So no matter what, start contributing to your 401(k) right away.

And finally, if you can save beyond your 401(k) contributions, put those savings on automatic and consider a traditional IRA or Roth IRA account. That way, you'll be less tempted to spend the extra money — and you'll have the satisfaction of knowing that you're paving the way for a financially secure retirement.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at You can e-mail Carrie at [email protected] The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at


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