How Much Should Your 401k Be at 30?

You know the importance of saving for retirement early, and perhaps you know that money you put into a 401(k) or IRA in your twenties is more valuable than money you contribute down the road. But how much should you have saved for retirement before turning 30?

Assuming you have been working since you were 22 or 23, at 30, your 401(k) account should equal about one year’s salary. For example, if you make $40,000 a year, you should have $40,000 saved.

Seem high? Don’t flip your lid if your account doesn’t stack up.

No two investors are alike, especially beginning investors. Your starting salary range and the number of years you have been working are going to be much bigger factors in determining your retirement savings balance at 30 than they should be at 40 or 50 when you will have had additional years to make catch-up contributions or adjust your portfolio as necessary.

Differentiating factors
You may not have much in retirement savings if you have been a student for much of your twenties, not to say those years of school won’t pay off. Higher education increases your salary expectation (and your potential to make larger 401k contributions down the road).

If you have been battling with credit card debt you also may be behind the benchmark, but with good reason. High credit card interest rates could crush even the best retirement account returns, so it’s best to use extra funds to dispatch credit card balances quickly.

That said, even indebted twenty-somethings should contribute the minimum 6% to a 401k. It’s important to develop the lifelong habit of making contributions.

And, if your employer matches contributions, not contributing is like passing up a part of your salary!

Assuming you start work at 22 and can immediately contribute to a 401(k), and your employer matches 50% of your contributions up to a maximum of 6% of your salary, you will need to contribute 10% a year to reach this goal, assuming an annual return of between 8-9%.

Factoring in irregular income and raises
Today many twenty-somethings will work several jobs before turning 30. If this is you, it means your income will fluctuate considerably. If you are ambitious, it is also possible that your salary could as much as double between the time you start working and 30. In these cases, set an absolute 401(k) savings goal for the time you turn 30 rather than using your annual earnings as a guide. (Also, be sure to consider the impact of vesting schedules on employer-matched retirement funds).

My rule of thumb for setting a retirement saving goal? Your contributions, up to the legal 401(k) contribution limit of $15,000 (in 2008), should be just large enough to feel uncomfortable. Think about what you could contribute. If you say, “I wouldn’t miss another $100 a month,” then consider going higher until you say “that might get a little tight.” Pull back five or 10% from that discomfort zone, and invest away!