Are you on track to have enough money in your 401(k) to retire comfortably, when you want? Or will you be stuck scraping by in your golden years, eating canned cat food and hovering over trash-can fires just to survive?
OK, that may be a bit melodramatic. But the truth is, a lot of U.S. families are closer to a Fancy-Feast-filled retirement than they think. According to the 2018 How America Saves report from Vanguard, the median 401(k) account has just $26,331 in it. That’s much less than the six or seven figures you'll likely need to retire.
That’s the bad news. The good news is that now is the perfect time to get your 401(k) in shape and build a solid retirement. Here’s what you need to do to make sure you’ll have enough to keep eating people food when you’re 90.
Here's what you'll need to retire
According to Fidelity Investments, you'll need to have ten times your final salary in savings if you want to retire at age 67. This means you should have six times your salary saved by age 50, and three times your salary saved by age 40.
If you're on pace with this schedule, congratulations -- you're in for a comfortable retirement. Don't despair if you can't meet these goals, though. Financial guru Suzie Orman recommends "doing the best you can do."
Here’s how much you should be saving per paycheck
The biggest 401(k) mistake people make is failing to make contributions to their account. If your employer offers a 401(k) plan, you should participate. This is especially true if your employer offers a matching program -- otherwise, you’re leaving free money on the table!
Financial experts such as Dave Ramsey advise investing no less than 15 percent of each paycheck (including your employer’s match) in retirement accounts. Yes, we know -- that’s a lot, but you’ll need a lot to retire and keep your current lifestyle. If you currently invest less than this, consider slowly increasing your contributions by one percentage point every few months. You can also bump up your savings rate the next time you get a raise.
Because 401(k) contributions are tax deductible (up to $19,000 in 2019), increasing your contribution rate will lower your tax bill immediately, making it even easier to save!
Here’s what you should be investing in
If you’re saving for your retirement in a standard bank savings account, you need to stop now. The less-than-one-percent interest you’ll get from a savings account or bank CD or giant money bin won’t be enough to cover the rate of inflation, meaning that your money will decrease in purchasing power over time. And you know what that means for your retirement: a shopping cart full of store-brand Meow Mix.
Instead, experts recommend you consider a target date fund that corresponds to the date you’d like to retire. The Blackrock LifePath 2045 Fund, for example, is designed only for people who want to retire around the year 2045. These funds invest aggressively when you’re young, but automatically rebalance themselves into safer investments as you get older. This protects your future against a last-minute stock market crash.
Index funds designed to mimic the overall performance of the S&P 500 average are another great option for young investors with a long time until retirement. Just be sure you’re able to stomach the risk of a short-term market decline. (Which, coincidentally, beats stomaching Purina Cat Chow.)
Don’t get bamboozled by high fees
Not all 401(k) investment options are created equal. Some funds offer a high level of management, but charge fees in excess of 1 percent per year. That may not seem like a lot, but even a 1 percent fee can add up to hundreds of thousands of dollars lost over your lifetime. Instead, keep a lookout for investment options with low fees.
Again, index funds are a great choice here. The two with the lowest fees are Vanguard's S&P 500 ETF (stock symbol: VOO) with an expense ratio of 0.04 percent, and Charles Schwab's S&P 500 ETF (stock symbol: SWPPX) with an expense ratio of 0.02 percent.