Best Retirement Plans For Individuals: A Complete Guide

Best Retirement Plans For Individuals: A Complete Guide

Employer pension plans are largely a thing of the past for most of us. The responsibility for saving for our own retirement is squarely on us. One important tool in saving for retirement is utilizing the best retirement plan options available to you. Depending on your situation, here is a look at some of the best options available for you.

IRAs

IRAs (individual retirement accounts) are a solid, tax-advantaged retirement savings option that is accessible to almost everyone. The ability to contribute is based on having earned income from employment or self-employment, though there are some exceptions.

IRAs can be opened at most brokerage firms and major custodians, as well as through banks, robo advisors, and many mutual fund providers. IRAs allow account holders to invest in a wide range of investment vehicles including individual stocks and bonds, mutual funds, ETFs, various cash accounts, and others. There are a few prohibited investments including life insurance policies and most collectibles.

Total IRA contribution limits are $6,000 for 2021 with an extra $1,000 catch-up contribution for those 50 or over. This limit covers all IRA accounts that you might hold in your name.

IRAs are here are several types of IRAs you can consider.

Traditional IRA

Contributions to a traditional IRA can be made either on a pre-tax or an after-tax basis. For those who are covered by a workplace retirement plan like a 401(k), there are income limits above which pre-tax contributions cannot be made. For 2021, these limits are:

Filing statusModified adjusted gross income (MAGI)Pre-tax contribution limit
SingleLess than $66,000$6,000 or $7,000 if 50 or over
>$66,000 and < $76,000Pro-rated phaseout
$76,000 or moreNo pre-tax contributions
Married filing jointLess than $125,000$6,000 or $7,000 if 50 or over
>$125,000 and < $140,000Pro-rated phaseout
$140,000 or moreNo pre-tax contributions
Married filing separately< $10,000Partial contribution
>$10,000No pre-tax contributions

Even if you are limited in the amount of pre-tax contributions you can still contribute the difference to a traditional account on an after-tax basis and/or to a Roth IRA if you are eligible to contribute to one based on your income.

For those who are not covered by a workplace retirement plan, there are no income restrictions on pre-tax contributions. If you are married and filing jointly with a spouse who is covered by a plan at work, there are income limitations on your ability to make pre-tax contributions.

Investments grow tax-deferred inside of a traditional IRA account until withdrawn. At that time the withdrawals are taxed as ordinary income, except for the value of any after-tax contributions. In most cases, if you withdraw funds prior to reaching age 59 ½ you will pay a 10% penalty as well. There are a few exceptions to this rule.

Traditional IRAs are subject to required minimum distributions at age 72.

Roth IRA

Contributions to a Roth IRA are made with after-tax dollars. Investments held inside of the account grow tax-free until withdrawn. If withdrawals are made on or after age 59 ½ and at least five years after your first Roth IRA contribution, then the withdrawals are tax-free. There are some cases where a withdrawal will be tax and/or penalty-free prior to age 59 ½. Without these exceptions, an early withdrawal can result in both taxes and a penalty.

There are no penalties or taxes on withdrawals of the money contributed to the account.

The ability to contribute to a Roth IRA is subject to income restrictions, here are the limits for 2021:

Filing statusModified adjusted gross income (MAGI)Pre-tax contribution limit
SingleLess than $125,000$6,000 or $7,000 if 50 or over
>$125,000 and < $140,000Pro-rated phaseout
$140,000 or moreNo contributions allowed
Married filing jointLess than $198,000$6,000 or $7,000 if 50 or over
>$198,000 and < $208,000Pro-rated phaseout
$208,000 or moreNo contributions allowed
Married filing separately< $10,000Partial contribution
>$10,000No contributions allowed

An advantage of a Roth IRA is that there are no RMDs making these accounts excellent planning tools in many respects.

Rollover IRA

A rollover IRA is a traditional or Roth IRA account that is set up to accept a rollover from a 401(k), 403(b), or other workplace retirement account when leaving an employer. You might establish a separate rollover account if you want to ensure these assets are not comingled with other IRA assets for a variety of reasons.

A rollover can be from a traditional 401(k) or other types of plan to a traditional IRA, or a Roth 401(k) or Roth account from another type of plan to a Roth IRA. A rollover from a traditional retirement plan account to a Roth IRA can also be done, but this would be considered a Roth conversion and subject to the applicable taxes due with the conversion.

A rollover IRA can offer a wider range of investment choices, often at a lower cost, than leaving the money in your former employer’s plan.

Spousal IRA

A spousal IRA is not a separate type of IRA. Rather it is a strategy that can allow a non-working spouse or one whose income is quite low. Spousal IRAs can be either traditional or Roth.

A spousal IRA allows the non-working spouse to contribute up to the maximum amount to an IRA which can help boost a couple’s retirement savings each year.

Employer-sponsored retirement plans

If your employer offers a retirement plan, you typically won’t have a choice as to the type of plan. These plans tend to be the best employer-sponsored retirement plans.

Traditional 401(k)

Traditional 401(k) plans are offered by many private-sector employers. This is the most common type of 401(k) account. Contributions are made on a pre-tax basis, money in the account grows on a tax-deferred basis. Employee contribution limits are $19,500 for 2021 with an extra $6,500 in catch-up contributions available to those who are 50 or over. There are no income restrictions that limit pre-tax contributions as with an IRA.

Some employers may provide a match to participants on a portion of the participant’s contributions. This is a great benefit as it is essentially “free money.” These matching contributions can help build account balances over time.

Money in the account will be taxed upon withdrawal. If withdrawals are made prior to age 59 ½ you may incur a 10% penalty, though there are some exceptions. Withdrawals are subject to ordinary income taxes. If you leave your employer on or after age 55 there is a provision that would allow you to take a distribution with no penalty if certain rules are followed.

Most 401(k) plans offer a menu of investment options, generally mutual funds in a range of investment asset classes. The quality and the costs of the plan investments can vary by the employer and you will want to understand this aspect when deciding whether or not to invest, and if so how much to contribute.

Roth 401(k)

A growing number of employers now offer a Roth option within their 401(k) plan. This can be an excellent opportunity for those whose income may prohibit or limit the amount they can contribute to a Roth IRA. There are no income limits on a Roth 401(k), contributions can be made up to the 401(k) limits in effect for that calendar year.

Employers may match contributions to a Roth 401(k), but these matching contributions must be made to a traditional 401(k) account based on the rules in place.

Distributions from a Roth 401(k) are not taxed if you are at least age 59 ½ and have met the five-year rule requirements. Roth 401(k)s are subject to RMDs, but these distributions will not be taxed if requirements are met.

403(b) 

These plans are generally offered to employees of non-profits and school districts. They are also known as TSAs for a tax-sheltered annuity. In the past, these plans were largely annuities, but rule changes in recent years have allowed investments like mutual funds to be offered.

The contribution limits are the same as with a 401(k). Some plans offer a Roth option as well.

TSP (Thrift Savings Plan) 

The TSP is a defined contribution plan offered to federal employees. Employees receive a matching contribution whether or not they contribute themselves. The plan offers a menu of low-cost investment choices, though this menu is generally a bit limited.

There is a three-year vesting schedule for employees after which all employer contributions are theirs if they leave the federal government. For 2021 the TSP contribution limits are the same as for a 401(k).

All of these options can be a good option for your retirement savings, though in the case of a 401(k) or 403(b) the quality of the plans and the investment choices can vary widely.

The Bottom Line

The responsibility for saving for retirement has fallen on the shoulders of employees over recent years. Options like IRAs and employer-sponsored retirement plans like a 401(k) are the cornerstone of retirement savings for most of us. Be sure to understand these options in order to make them work for you.

6 Key Retirement Planning Steps To Take

6 Key Retirement Planning Steps To Take

Retirement is a major financial goal for most of us and one that takes planning and commitment to achieve. With increasing life expectancies, many of us will be retired almost as long as we worked over the course of our careers. Getting an early start, saving and investing on a consistent basis, and having a plan are all key components of achieving the goal of a comfortable retirement.

6 steps of retirement planning

Here is a look at six key steps to take in your retirement planning journey.

1. Know when to start planning for retirement

Ideally, you can get started as soon as you start your first job by contributing to your company’s 401(k) or similar retirement plan. One of the advantages of starting early is reaping the benefits of compounding on your retirement investments. The power of compounding has been dubbed as a “miracle” of finance and can have a powerful impact on your ability to accumulate a sufficient nest egg for retirement.

Some folks can’t start planning and saving for their retirement as early as they might like. No matter where you are in life, the best day to start planning for retirement is today. Don’t put this off.

2. Determine how much you need to retire

Typical rules of thumb assume that we will need 70% – 90% of our pre-retirement income in retirement. This can be a good starting point. Over time, however, you will want to refine this estimate to try and get a more precise figure.

As you approach retirement it’s important to develop a retirement budget that is based on realistic estimates of the anticipated costs of your retirement lifestyle. This includes where you might live, your activities such as travel, and other expenses. Don’t forget to factor in the cost of healthcare. This can help you determine how large of a nest egg you might need to support your desired lifestyle. Be sure to factor in Social Security and any pensions you might be entitled to.

3. Prioritize your financial goals

Financial planning is all about setting priorities. What’s important to you? Retirement planning is likely a high-priority goal. But other goals like funding your children’s college educations, saving for a home, or accumulating capital to start a business might also be high priorities.

Prioritizing your financial goals and determining how much of your savings to direct towards each of these goals is a key step in your financial and retirement planning process. Note that the priority of your various financial goals is likely to change over time as your reach some of those goals and your life circumstances evolve.

4. Select the best retirement plan(s) for your needs

A key part of retirement planning is saving for retirement. Where you save makes a difference. Here are some tax-advantaged retirement plan options you might consider.

IRAs

IRAs can be traditional or Roth accounts. In a traditional IRA, your contributions may be pre-tax in some cases or after-tax if you earn too much. Your contribution grows tax-deferred and is taxed upon withdrawal.

Roth IRAs are funded with after-tax contributions, but the account balance can be withdrawn tax-free if certain rules are met including being at least 59 ½ and having had a Roth account for at least five years. The ability to contribute to a Roth IRA is limited based on your income.

IRA contribution limits across all types of accounts are $6,000 for 2021 with a $1,000 catch-up contribution for those who are 50 or over.

401(k)s and similar plans

Employer-sponsored retirement plans such as a 401(k), 403(b) or 457 allow contributions of $19,500 with a $6,500 catch-up contribution for those who age 50 or over in 2021.

These plans typically offer a menu of mutual funds or similar investments from which participants can choose. Some plans offer a Roth version in which withdrawals can be made tax-free if certain requirements are met. Unlike a Roth IRA, there are no income limits on your ability to contribute.

Additionally, your employer may match your contributions and also might make contributions to a profit-sharing account on your behalf.

Self-employed retirement plans

For those who are self-employed, there are several options to choose from. These include a Solo 401(k), a SEP-IRA, and a SIMPLE IRA. These plans all have different requirements but they do allow those who are self-employed to save and invest in a tax-advantaged plan.

It’s certainly OK to mix and match where it makes sense. For example, you might contribute to your 401(k) at work, an IRA account, and also save and invest in a taxable account for retirement.

5. Understand your time horizon

Your time horizon until retirement is a critical aspect of retirement planning. A 30-year old and a 55-year old have different time horizons until they retire and this creates different planning priorities.

A 30-year old has a long time horizon and their focus should be on saving as much as possible and letting their retirement savings grow and compound. A 55-year old has less time and should be thinking about issues such as will they have enough to fund their anticipated retirement lifestyle, how to pay for healthcare in retirement when to claim Social Security, and planning for how to take payments from a pension if they have one.

6. Choose your investments

Choosing the appropriate investments to help reach your retirement goal is critical. You want to take an appropriate amount of risk to allow your investments to grow, but you want to be sure the level of risk is appropriate for your own risk tolerance.

Within a 401(k) or similar retirement account, you will typically have a choice of investments, including a managed fund like a target-date fund. Be sure to choose an allocation that balances growth with a reasonable level of risk. Typically younger investors will and should take more risk with their retirement savings, easing back a bit periodically as they approach retirement.

The Bottom Line

Retirement planning is an important function for anyone hoping to retire with a comfortable nest egg. This should start as soon as your start working, but even for those who may feel behind it’s never too late to get started.

It often makes sense to consult with a financial advisor to help ensure that you are on track.

What Is A Financial Planner, and Do You Really Need One?

What Is A Financial Planner, and Do You Really Need One?

A financial planner provides guidance and expert advice tailored to help you achieve your financial goals. Financial planners are professionals who work with various clients to assist them with their financial planning needs in line with their unique situation.

What does a financial planner do?

A financial planner works with you to guide you through the financial planning process. The financial planning process involves:

  • Reviewing your current financial situation.
  • Helping you define your short and long-term financial goals.
  • Working with you to construct a comprehensive plan to achieve your goals.

A financial planner may help you on a one-time basis, or the relationship might be more ongoing. Certified financial planners may provide additional services like investment advice, retirement planning, tax planning, and estate planning.

Do you need a financial planner?

Many people successfully do their financial planning. If this is something that you are comfortable with and feel that you have the requisite knowledge to handle, perhaps the DIY approach is right for you.

However, for many people, the expertise of a knowledgeable, experienced financial planner can be beneficial in formulating a financial plan to help them achieve their financial goals. Besides the expertise that a financial planner brings to the table, they can offer their clients a detached, third-party perspective on their financial situation.

In many cases, this is as important as the experience and expertise they bring to the client engagement. Even the most financially knowledgeable person is emotionally invested in their own financial success. This doesn’t always allow them to take an objective look at their financial situation.

Types of financial planners 

Deciding the type of financial planner to choose will depend on your financial situation and needs.

Certified Financial Planner

Certified Financial Planner or CFP® designation is granted by passing a rigorous and comprehensive exam and satisfying education and work requirements. The CFP board requires certificate holders to earn several continuing education hours overtime to maintain their certification.

The CFP is the “gold standard” of designations in the financial planning profession. Certified Financial Planners are consistently held to a high standard when providing financial advice. They must act as fiduciary, and therefore, provide advice that is in your best interest.

Financial planner or financial advisor

Many financial planners hold regular office hours and see their clients in person. Financial planning services may be offered as their primary professional focus or as part of a more extensive menu of services they offer.

Some financial planners provide financial planning advice on an as-needed, hourly basis. Others may create a holistic financial plan on a flat-fee basis with updates supplied via a separate fee structure.

A financial planner is not a one-size-fits-all professional. Many professionals who serve as financial planners offer additional services. The financial planning they offer might be a lead to these other services.

Many financial planners offer ongoing investment advice, plus help in specialized areas such as tax planning and estate planning. Some financial planning professionals may focus their efforts on a specific group of clients such as medical professionals, employees of a local company, teachers, etc.

A Financial planner work under labels such as financial advisor, investment advisor, wealth manager, and others. When looking for help with your financial planning needs, be sure to look closely at the services these professionals offer and how they charge for these services. Always remember, not all financial planners are certified financial planners (CFP).

Robo advisors

In recent years, several robo advisors have emerged on the scene. These online advisors use algorithms to provide investment management primarily. A robo advisor may be a great low-cost solution to help meet your goals if you’re starting. If your financial situation is not complex and you do not need a comprehensive financial plan, a robo advisor may be ideal for your situation.

Financial planning help may be included in the fees you pay or may be extra. Some robo advisors offer the option to speak with a live financial planner. Still, this generally involves an additional cost or having a minimum amount of investment assets with them. As with any service you might consider, be sure to verify that the financial planning services offered by any robo advisor that you are considering align with your needs.

Online financial planners

Several services focus specifically on providing financial planning advice through their online platform. Unlike robo advisors, who focus on investment management, these online services focus on financial planning, retirement planning, and related areas.

Again, be sure to thoroughly check out any online financial planning platform you may consider to be sure that their services fit your needs and fully understand any fees or charges involved.

Financial planner vs. financial advisor

These terms can be confusing to those looking for financial advice. In reality, there might not be much difference. Someone who holds themselves as a financial planner focuses primarily or exclusively on providing financial planning advice.

Those who call themselves financial advisors, investment advisors (or advisers), wealth managers, or who go by other labels may offer very solid financial planning advice as part of an array of other services they offer, including investment management.

It pays to ask any prospective financial professional you are considering about the services offered and the types of clients they serve to ensure you find someone who is a good fit for you.

Fee-only vs. fee-based

These terms can be confusing to many clients. It is critical to ensure that you fully understand how anyone you work with for financial planning or any other type of financial advice is compensated.

Fee-only means exactly what it says. Fees paid by the client will compensate the financial planner. In a financial planning engagement, this might be hourly, a flat fee for the plan, or included as part of other services the financial professional provides you.

Fee-based or “fees and commissions” often involves a financial planner providing financial planning service for a fee and sales-related compensation. The planner will help the client implement the financial planning recommendations via investment and financial products that pay a commission or a percentage of assets under management to the financial planner.

We can’t stress enough the need to be 100% clear about how any financial professional you are considering is compensated before engaging their services.

Working with a financial planner

When working with a financial planner, you should expect to be asked a lot of questions about your financial goals, as well as your personal and financial situation. Your planner will ask for detailed financial information about your investments, your spending, debt, retirement savings, and a host of other areas.

After this information-gathering process, you can expect your financial planner to take some time to formulate their recommendations and create a holistic financial plan. During this process, they may have additional questions as they review the results of the data they have gathered from you.

Once completed, the financial planner will then present their recommendations to you. If they are helping you with a few issues, they will likely send a report for your review. If it is a holistic financial plan, they will generally present a preliminary plan before finalizing it, which allows you to ask additional questions and provide any changes you may have.

After this initial engagement, you may want to work with the planner on a more regular basis if applicable based on the services they provide. In all cases, you should feel empowered and encouraged to ask them questions and challenge their assumptions if appropriate. If the planner doesn’t promote this, they may not be someone you should have work with.

The bottom line

A financial planner helps clients organize their financial goals and helps devise strategies to allow them to achieve their goals. Financial planners come in several forms, including online and robo advisors. It’s essential to pick a financial planner that you are comfortable with, provides the best value, and who you feel can help you achieve your financial goals based on your unique situation.

What Is A Financial Plan? It’s Key Components, And How Can I Build One?

What Is A Financial Plan? It’s Key Components, And How Can I Build One?

A financial plan is a comprehensive picture of your current financial situation, defines your financial goals, and acts as a roadmap to ensure that you achieve your financial goals. Your financial plan will spell out the financial steps you will take to achieve those goals, a timeline, and benchmarks against which to track your progress.

What is financial planning?

Financial planning is a process rather than a one-time event. While creating a financial plan is a positive step at any point, things change over time. Financial planning should be an ongoing process. Your financial plan should be reviewed periodically, revising as needed to reflect your situation and goals changes.

Essential elements of a financial plan

While everyone’s situation is unique, there are several basic elements that should be considered in your financial plan. These generally include:

Budgeting

Budgeting is about what you earn and spend on a monthly, quarterly, or annual basis. In other words, this is about your regular cash flow. Regardless of what stage of life you are in, this is a critical first step in the process. Indeed, if you are spending more than what is coming in, this is an issue that must be rectified. Your cash flow is going to determine the amount you can save and invest to meet your goals.

Retirement planning

Retirement planning is critical whether you are in your first job with many years to go until retirement or in your 50s and closing in on retirement.

For younger individuals, it is critical to start saving for retirement as soon as possible. If you are covered by a retirement plan like a 401(k) at work, be sure to contribute as much as you can to the plan from the start. If there is an employer match, be sure that you contribute enough to earn the entire match as this is free money you don’t want to ignore.

For those closer to retirement, planning entails looking at your retirement spending plan, your various sources of income such as Social Security or a pension, as well as your retirement savings. From there, you will need to develop a plan that matches your spending with a level of retirement income that you can reasonably expect to support.

Risk management planning

Life doesn’t always go as we plan. Things happen—this way, we need to include risk management planning as part of the financial planning process.

Risk management often entails the use of several types of insurance. Depending upon your situation, this could include:

  • Life insurance to ensure that your beneficiaries are taken care of in the event of your death. This can be especially important for young parents and others who have not had the opportunity to create a nest egg.
  • Disability insurance may be more important than life insurance as it provides an income in the event you become disabled, which is more likely than dying during your working years.
  • Property and casualty insurance to protect your home and auto.
  • Umbrella insurance to help protect against a potential lawsuit.

Investment planning

Investing is the key driver that fuels our ability to meet our financial goals for most of us. Investment planning includes how your investments will be allocated among different asset classes or types of investments. It also entails planning how much and where you will invest, including IRAs, a 401(k), and taxable accounts among others.

Tax planning

Proper tax planning can help build wealth. Tax planning involves the best timing for realizing gains on investments, tax planning around your business, and generally, making sure you do things in the most tax-efficient manner possible. While investment decisions shouldn’t be driven by tax considerations, looking at the tax implication of financial decisions can help ensure that you don’t pay more in taxes than is necessary.

Estate planning

Estate planning is the process of setting a plan to distribute your assets in the event of your death. The first step is determining which assets should go to which beneficiary. If you are married, it’s likely your spouse is your primary beneficiary. In other situations, it might be your children or others.

Proper estate planning can ensure that beneficiary designations are up-to-date on IRAs, insurance policies, and other retirement accounts. It’s also important to ensure that investment accounts and property are appropriately titled to ensure that they will be inherited as you desire.

Financial planning in 6 easy steps 

For those looking to do their own financial planning, these six easy steps are a good starting point:

1. Set your financial goals and consider your priorities

This entails determining what’s important to you financially. A short-term goal might be saving for a down payment on a home. Longer-term goals might include saving for college costs for your children or saving for a comfortable retirement.

Determine what’s most important to you, your time frame for achieving that goal and what strategies it will take to achieve your goal.

2. Track your money and determine cash flow

Be sure to track your spending and your income continuously. Things can change, and changes here can impact your ability to achieve your financial planning goals.

3. Build an emergency fund

A critical step as you start your financial planning journey is to build an emergency fund. Many experts suggest that you have at least six months’ worth of your ongoing living expenses saved as an emergency fund. This money should be kept in a liquid, low-risk account so it can be accessed if needed, for example, in the event of a job loss. This will prevent you from having to tap your investments to cover a major unexpected expense.

4. Pay off high-interest debt

Having to make payments on high-interest debt, such as credit card debt, can be financially crippling. It’s essential to do whatever is needed to get this high-interest debt paid off as soon as possible to free up the cash you need to save and invest for your financial future.

5. Invest for the long-term and retirement

It’s essential to begin investing for long-term goals, especially retirement, as soon as possible and to continue investing throughout your working career. If you have a retirement account, like a 401(k) available to you, start as soon as possible by contributing. Increase the amount you save as soon as you can. The power of compounding over time can be the most significant retirement savings advantage for those with many years to go until retirement.

6. Use insurance to protect 

Having the proper types of insurance coverage can help protect you and your family in various situations and is a key part of your financial plan. Life insurance, health insurance, disability coverage, long-term care insurance, property and casualty, as well as liability coverage, are all important types of insurance coverage that can help prevent unexpected life events from derailing your financial planning efforts.

Where to get professional financial planning help

There are many places to turn to for those who feel they need professional help in preparing their financial plan.

A growing number of robo advisors offer financial planning help. In some cases, you may be able to discuss your situation with a financial advisor in addition to using their software to help formulate your plan.

Several financial planners offer financial planning help and advice, often on an hourly basis (fee only).

For more focused, tailored financial planning help, contact a CFP certificate holder. These professionals are trained in all areas of the financial planning process. They can offer advice tailored to your particular needs, including general financial planning, investing, and all of the components mentioned above. Be sure you thoroughly vet any financial advisor you may be considering. Fully understand how the advisor is compensated and the services they provide.

The bottom line

Just like with a business, it’s crucial to have a personal financial plan. The financial planning process helps you look at all aspects of your financial life and creates a roadmap to achieve your financial goals. Financial planning is not a one-time process; your plan should be reviewed periodically to ensure that you are still on track as your situation changes.

The Average 401(k) Balance By Age and Income Level

The Average 401(k) Balance By Age and Income Level

401(k)s are among the most common ways to save for retirement in the United States. There is a good reason the employer-sponsored plans are so popular—they are tax-sheltered (up to $19,500 per year in 2020), maximizing your retirement dollars and making them one of the best retirement savings options for many Americans. Therefore, it is surprising that although 59% of Americans have access to a 401(k), only 32% are investing in one. A recent study by Personal Capital shows that two in five (37%) pre-retirees have no money saved for retirement whatsoever.

The majority of Americans who haven’t saved for retirement are counting on Social Security for the bulk of their retirement income. However, that is an increasingly risky bet. As more of the massive Baby Boomer generation retire, the Social Security fund is being drained. It has begun dipping into its reserves to make monthly payments, and many projections indicate that the fund may be depleted completely by 2034. Therefore, Generation Xers and millennials can expect smaller Social Security payouts, if any, which are not likely to cover their expenses when considering inflation and rising costs of living. Investing in a 401(k) is more critical now than ever.

Average 401(k) Balance By Age

*Based on statistics from “Building Financial Futures 2020” from Fidelity.

Retirement can feel like the distant future at the beginning of your career, and other investments often appear more relevant and/or attractive to young workers. However, the best way to ensure your financial security and maximize tax benefits and employer contributions (when applicable) is to begin investing in a 401(k) as soon as you begin regular employment. Unfortunately, many young people do not invest in a retirement plan during their initial decade/decades of employment or only invest minimal amounts. Based on statistics from the leading 401(k) provider Fidelity, the below data shows both the average and median amounts Americans invest in their 401(k)s by age group.

Ages 20-29

Average 401(k) balance: $13,200

Median 401(k) balance: $5,000

Fidelity recommends accruing an amount equal to at least one annual salary in your retirement account by age thirty. For example, if your annual salary is $50,000, you should have saved at least $50,000 in your 401(k) by age 30.

Ages 30-39

Average 401(k) balance: $46,200

Median 401(k) balance: $18,500

Fidelity recommends accruing an amount equal to at least three annual salaries in your retirement account by age forty. Therefore, if your annual income is still $50,000, you should have $150,000 in your 401(k) by the end of this decade. This can be challenging, as expenses often skyrocket during this period of your life due to the birth of children, mortgages, and other housing expenses.  Contributing your raises and bonuses towards retirement can keep you from falling behind during this critical decadeAges 40-49

Ages 40-49

Average 401(k) balance: $111,100

Median 401(k) balance: $39,200

By age fifty, retirement is getting closer, and Fidelity recommends that you accrue an amount equal to six times your annual income by that time. Statistics indicate that only a small minority of Americans are hitting that goal.

Ages 50-59

Average 401(k) balance: $188,100

Median 401(k) balance: $65,300

By the time you reach sixty, retirement is around the corner, and Fidelity recommends that you have eight times your current salary saved up. If you have fallen behind in previous decades, your fifties are an excellent time to catch up, as the contribution ceiling is higher for people over fifty. For employees under fifty, the 2020 contribution limit is $19,500, but people 50 and older can add another $6,500 to that amount, for a total of $26,000 annually.

Ages 60-69

Average 401(k) balance: $212,600

Median 401(k) balance: $67,600

Many Americans retire during this decade, making it the last opportunity to save for retirement. Therefore, it is a good idea to calculate your total yearly expenses and then multiply that amount by 30, assuming that you live to a ripe old age. The calculation doesn’t consider investment earnings, inflation, or unexpected expenses. Still, it will give you an idea of how much more you need to save and perhaps encourage you to increase your investment in your 401(k) as you prepare to retire. Sadly, the data shows that most Americans haven’t saved anywhere near what they need to retire comfortably.

Average 401(k) Balance By Income Level

*Based on Vanguard’s “How America Saves” annual report for 2020

The below statistics, provided by Vanguard, show how little America’s neediest citizens are saving. While Americans with an income of $150,000 or more have saved a median of $76,448, Americans who earn less than $15,000 have a median savings of a mere $1,376, less than a drop in the retirement bucket. Saving for retirement is not easy when your income is low, but even small savings can be significant over time, especially when supplemented by employer matching.

Income Level: Less than $15,000

Average 401(k) balance: $15,843

Median 401(k) balance: $1,376

When you’re in this income bracket, it can be a challenge to cover your monthly expenses. You’re probably living from paycheck to paycheck, and saving for the future may seem very difficult. Many people don’t realize that even small amounts build up over time, especially if your employer matches your contribution. Try cutting unnecessary discretionary expenses and contribute your savings towards retirement. If you’re young, time is on your side. You can invest in education and training to raise your earning potential and allow you to save more in the future.

Income Level: $15,000 – $29,999

Average 401(k) balance: $10,283

Median 401(k) balance: $2,678

Most people at this income level do not have advanced education, limiting their future earnings and current income. If you are in this bracket and on the younger side, investments in education will lead to higher-paying jobs, allowing you to contribute more towards retirement. If it is an obstacle to pursue an advanced degree, consider side-hustles like Uber, Appen, DoorDash, and freelancing to obtain additional income. Like people in the last category, members of this category are struggling to make ends meet. While their median balance is slightly higher, their average balance is lower, perhaps reflecting the fact that members of this category often have to support other people on their income.

Income Level: $30,000 – $49,999

Average 401(k) balance: $22,679

Median 401(k) balance: $6,909

No matter where you live, this is the income range where you want to start investing heavily in your 401(k). Experts recommend saving at least 20% of your income to build a strong financial foundation. Recent college graduates often find themselves starting in this income range. Since the early investment will pay off more in the future, savvy young adults can begin saving heavily and cut costs by limiting discretionary expenses. In this category, how much you can save depends on where you live. Living in expensive cities, it can be hard to get by, but in other areas, it may be possible to live comfortably in this income range, giving you the option to start saving.

Income Level: $50,000 – $74,999

Average 401(k) balance: $54,588

Median 401(k) balance: $21,359

Experts recommend that people in this income bracket contribute 10-15% of their annual salary towards their 401(k). If you do so consistently, you’ll be in excellent shape for retirement and most likely retire on time. People begin to live comfortably in this income bracket, which explains why it has the highest median balance jump. People in this bracket often have stable jobs that allow them to think ahead and plan for the future.

Income Level: $75,000 – $99,9999

Average 401(k) balance: $92,596

Median 401(k) balance: $41,507

People generally have more disposable income in this income range, and saving for retirement is no longer a considerable burden. Experts recommend that you max out your 401(k) if you’re in this category. The small pinch now will lead to a massive payoff in the future.

Income Level: $100,000 – $149,000

Average 401(k) balance: $137,058

Median 401(k) balance: $61,635

It should be easy to max out your retirement accounts in this bracket, but surprisingly, many people in the six-figure income range don’t even have a full year of income saved for retirement. Usually, this is due to lifestyle choices. However, you don’t want your current lifestyle to come at the expense of your future financial security. The more you save, the more financial freedom you will have in the future, and in this income bracket, there is no reason not to maximize your savings.

Income Level: $150,000 and above

Average 401(k) balance: $193,130

Median 401(k) balance: $76,448

If you are in this income bracket, there is no reason you shouldn’t be maxing out your 401(k) every year. However, averages show that many people have high discretionary spending and miss out on the tax breaks and the financial security a 401(k) can provide. It’s never too late—if you’re in this category, start maximizing your savings today.

Breaking It Down: Where Do You Stack Up?

There are many valid life challenges that legitimately impact how much you can contribute to your 401(k). However, smart financial planners will always make retirement savings a top priority and take the right steps to ensure they are saving wisely. The two data sets, savings by age and savings by income level, show that very few Americans invest sufficiently in their 40(k)s. While this might be predictable for people in lower-income brackets and younger age categories, surprisingly, it is a problem across the board.

6 Best Strategies to Boost Your Retirement Savings

Understand when you want to retire: When choosing the best retirement savings plan for your needs, it is crucial to think about when you want to retire. If you enjoy your work and it does not require hard physical labor, you may aim to work well into your seventies and feel comfortable investing less in your 401(k) or retirement savings plan every month. However, things don’t always go according to plan, and therefore it is a good idea to give yourself a safety cushion. Even if you don’t plan to retire when you turn 65, unexpected health or personal problems may force you to do so. Increasing your investment in your 401(k) will ensure that you are covered if you need to retire earlier than you planned.

Meet with a financial advisor to discuss your goals: General advice is helpful, but at the end of the day, each person’s situation is unique. A qualified financial advisor can review your financials’ specifics and recommend options that fit your age, health, ability to manage risk, the projected scope of investment, dependents, and more. For example, a person at the beginning of his/her career may benefit from different options than someone with a short retirement time horizon. A person with a secure, tenured position may require a different plan than someone working in a more volatile profession. He or she can look at your unique situation and create a comprehensive retirement plan tailored to your needs. The plan will detail how much you need to save to retire comfortably while maintaining your current lifestyle and assessing whether you will have enough income to last through retirement.

Take full advantage of your employer’s 401(k) match: If your employer offers a 401(k) with match funding, and you aren’t contributing to the fund in full, you are basically giving away money. In matching programs, employers match what you invest in your fund, so the less you put in, the less they invest. It may seem impossible to invest the full amount—life is full of burdensome and sometimes unexpected expenses such as medical bills or college tuition that may lead you to reduce your investment in your 401(k). However, the less you invest, the less your employer is putting in. Therefore, it is always a good idea to make saving for retirement a top priority in your monthly budget.

Reduce or pay off debt: The average credit card rate or interest rate on loans far exceeds the stock market’s historical average annual return, which reflects the earnings you can expect to receive from your 401(k). Therefore, even if you have saved for retirement, if you have also incurred debt, you can get caught in a cycle in which your debt interest rates outpace your earnings from retirement investments. It is recommended that you prioritize reducing or paying off your debt over your investments in retirement plans. If possible, it’s best to do both.

Contribute to an IRA: Like 401(k)s, IRAs offer valuable tax benefits. However, rather than being sponsored by employers, they can be opened by individuals through brokers or banks. If your employer offers a 401(k) with an employer match, it makes sense to invest enough in your 401(k) to maximize the employer match. Once you have received the maximum match or your employer does not offer a match, you may want to consider investing in an IRA, where there is a larger selection of investment opportunities and fewer administrative fees than in most 401(k)s.

Develop other sources of income: Like in all investments, it is always a good idea to diversify when saving for retirement. 401(k)s have the advantage of being tax-exempt, but they are not risk-free. Therefore, if you have the option to supplement your retirement income with an alternative investment such as a rental property, you can protect yourself from stock market fluctuations and other market fluctuations that may impact your 401(k).

The Bottom Line

Projections show that the value of Social Security payments for Gen Xers and Millennials will not be enough to support them in retirement when taking the rising cost of living into account. Therefore, it is critical that pre-retirees invest in a 401(k) or other tax-sheltered retirement savings plans such as IRAs. If your employer has a matching option, it is a good idea to maximize your 401(k) investment at least to the matching maximum to utilize your full benefits. Likewise, it is important to minimize debt, as the interest rates on debt often surpass the income from retirement savings plans.

No matter how old you are, retirement is coming, and there is no better time to start saving than right now.