Pod Insights Money Guy Show Are You Saving Enough? 401(k) Balances by Age Revealed! About this episode Curious how your 401(k) stacks up? Our annual break down is back with the latest Fidelity data on average 401(k) balances by age and how to use your 20s, 30s, 40s, and beyond to build wealth strategically. From understanding your match and optimizing contributions to making smart investment decisions, this episode is packed with tips to help you hit your retirement goals.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 Your sausage McMuffin with egg didn't change. Your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just $5. Only at McDonald's for a limited time.
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0:41 Brian Preston? Average 401K by age 2025.
0:51 Speaker 04 Brian, I am so excited. This is one of our favorite shows that we get to do every single year because if we're going to be honest, we love 401Ks.
1:02 Brian Preston? Well, I mean, there's so much to love about 401Ks. We think about millionaires, this, you can't, I gotta tell you, the majority of millionaires I meet, they have very large 401Ks. Despite what social media says, but there's actually some benefits that are tangible on 401Ks that we should cover.
1:20 Speaker 04 That's exactly right. Some of the benefits are, number one, they are tax advantaged, meaning that when you put money into your 401K, you can either save money on your taxes today, or you can save money on your taxes in the future. It's one of the legally best ways to hide money from Uncle Sam.
1:37 Brian Preston? And number two, get that free money.
1:40 Speaker 04 Woo! I love it. It's not just this kind of stuff, but it's also the behavioral stuff that people love about 401Ks. Brian, you say this all the time, one of the best ways that someone can set themselves up for success with their 401K is just by doing it. Because as soon as you enroll, as soon as you opt in, you automate your financial life to start building for the future.
1:59 Brian Preston? Well, I mean, and don't, don't sleep on the 50 to 100% guaranteed rate of return. And I like the automation because it actually makes the good habits that much easier. Dramatic for the people, if you can already just set up every month without you thinking about it, you're going to be putting money towards the future. How do you go wrong when things like that are set up?
2:19 Speaker 04 And when you do this, when you're doing in your 401k, it naturally puts you in the position to pay yourself first. If you are saying, okay, out of every single paycheck, I just want X dollars or X percent to go into my financial future, it's really, really, really hard to screw that up.
2:34 Brian Preston? And then the last thing I was, you know, we just want to make a point on buy and hold. I mean, if you typically look at the behavior of the average investor, people are such emotional creatures that they jump in and out with market volatility. Well, here we are with a 401k, which already restricts your access until you reach retirement age, or should restrict it. It's going to be a kind of a volatility shock absorber. It's going to allow you to actually buy into these volatile markets, have the incentive to stay consistent, and it's going to help you with that buy and hold behavior that creates success.
3:06 Speaker 04 Now, what I love about it is most people have access to this. When they start their very first job, when they start out at the very beginning of their career, what's beautiful is that the earlier you start, the younger you are when you begin this, the easier the work of building wealth becomes, the less that you actually have to save on your path to financial independence. If you think about this, a 20-year-old that wants to be a millionaire only has to save $95 a month to do that. But if you wait until you're 50 before you start taking it seriously and you want to be a millionaire by the time that you retire, you have to save over $3,100 a month just to get to that same million.
3:45 Brian Preston? Well, the thing that I love is if, when you look at this visually, is that for the 20-year-old who starts saving and investing, by the time they reach retirement, there's a good chance that 95% of their account value will be your army of dollar bills doing all the heavy lifting, meaning the growth in the income of the account. If you're a person who starts in your 30s, it's okay. You're still, 86% of the account value is likely the growth in income, even for somebody who starts out and says, well, you know what? I'm just now finding the money got shown. I'm in my 40s. What does that mean for me? A 40-year-old can start out from zero. And still by retirement, 68% can be coming from the growth of your assets and your investments.
4:27 Brian Preston? So don't sleep on that. We tell you, time is going to be the powerful component that maximizes all the compounding growth that is coming your way to let your money work harder than you can with your back, your brain, and even your hands.
4:40 Speaker 04 You know what I'm saying? Okay, guys, guys, guys, I hear you and I love this, but I don't actually have access technically to a 401k. Well, that's okay. Everything we're going to talk about today is going to be translatable across additional retirement accounts. If you're someone who potentially is like a teacher or in the medical field or a governmental worker, you might have access to maybe like a 403B, or maybe you might even have access to a 457, or you might be a government employee and you get to participate in the TSP, the Thrift Savings Plan. So everything we're going to talk about today, if you have access to one of those types of plans, these facts also apply. But it's not just for folks who only have employers, Brian.
5:23 Brian Preston? Yeah, well, I mean, every one of those plans you just laid out, the 403B, 457, TSP, they still kind of are structured where they let you save it, lump some. But in the past, self-employed individuals, Beau, had to go a different track.
5:35 Speaker 04 That's right.
5:36 Brian Preston? And the government had set up where you could do like SEP IRAs, simple IRAs, and you always felt like a second-class saving citizen if you were self-employed. You're like, I wish I had more of the tools that the corporate America has, what they're using for saving for their employees. Guess what? At some point, I mean, it hasn't been around that long, but it's been around long enough that the solo 401k allows entrepreneurs and anybody who's got side hustle income or self-employment income, you now have the opportunity to create something that's actually better than the corporate structure. And the fact that the government has structured this where all that annual compliance testing and tax filing, until your account gets to a certain size, it's out of here.
6:17 Speaker 04 That's right.
6:18 Brian Preston? You don't have to do it. So solo 401ks are great retirement vehicles, too.
6:22 Speaker 04 All right. So we love 401ks and we love how powerful they are. We've already laid out the advantages that exist there. Now let's shift, Brian. Let's start talking about the numbers. Let's start talking about, okay, how does the average American use this tool and where are they at? And what's wonderful is Fidelity did a huge study and they're one of the largest 401k providers in the world. So when we think about who has access to data and access to information, Fidelity would be that group. And what's amazing is they went and looked at all the different plans they manage and all the different 401ks that they have access to. And they were able to break it out by age. What's the average 401k balance for a participant inside of a
7:03 Speaker 04 Fidelity 401k plan? And this is what we found, that for 20-year-olds, those who are 20 years of age, average 401k balance right now is about $4,400. For 25-year-olds, the average 401k balance, a little over $15,600. And for 30-year-olds, the average 401k balance, about $35,000. Brian, are these numbers impressive, not impressive? You like these?
7:31 Brian Preston? No, I mean, look, this is the decade to get serious about this because your 20s is the decade you should be investing in building assets, not liabilities. It's because, I gotta tell you, it troubles me that you're a billionaire of Tom at this age, and yet people don't eat, are not even reaching a savings rate. And here's a stat that will freak you out. I put this in conjunction with when we get data from the government that shows that really, people only have assets in two places. Their home, and then now it's starting to make me think only in their employer-provided 401k, because we find out that half of Americans report never having invested outside of their 401k, meaning that this is it. You know, you
8:15 Brian Preston? basically got your house, and then you're probably, because you didn't want to miss out on that free money from your employer, we want you to go beyond that. And that's why I love that we get to do content to get you outside of that, so you can maximize every dollar that comes into your army of dollar bills.
8:29 Speaker 04 Yeah, we know. If you're a financial mutant and you've been following the Financial Order, Brian, you know the Financial Order operations? Not only are you going to take advantage of your 401k, but you're also going to be using HSAs and Roth IRAs and other types of investment vehicles. So what we want to compare for you is where should you be? Where should your liquid net worth be when you look at all of your investments? Not just your 401k. And we want to compare that to the 50% of Americans who only have access to a 401k. And so you may be asking the question, well, how much do I need? And ultimately, the answer is it depends. It depends on your unique situation. But what we want to do is we want to give you some, some mile markers,
9:10 Speaker 04 some posts to kind of walk you through where you should be on your journey. And we know, we've shared this on the show with Tom, that by the time that you're 30 years old, we say that we want you to have about one times your annual salary saved up. And I think that's pretty, uh, pretty common knowledge. I think Fidelity agrees with that. We agree with that. I think it's, it's, it's not an incredibly difficult thing for most folks to do by the time they get to age 30.
9:36 Brian Preston? So with that, if you put that context in there, we showed that by the, the fidelity data was around 30,000, a little over $30,000. And we know the median income is over 50,000. There seems to be somewhat of a disconnect there.
9:51 Speaker 04 So we know if we want to start at age 30 with about one times our salary, and ultimately if we're trying to work towards age 65, a traditional retirement, where we want to be able to replace 80% of our pre-retirement income with a 4% withdrawal rate. Our goal by the time that we get to financial independence, we get to retirement, would probably be somewhere around 20 times our annual salary. So we've got to figure out how do we go from one times our salary at age 30 to 20 times our salary at age 65? What's, what are the mile markers? What are the marks we ought to hit? So if we think about folks in their twenties, we know that right now, the median income for someone in their twenties is about 54,000, almost $55,000 a year.
10:33 Speaker 04 Well, if you remember, the average 401K for someone 20s, someone who's 20s, about $4,400. At 25, it's about $15,600. Brian, you just alluded to this. The average 401K balance is about $35,000. If you're going to be a financial mutant, you want to hit the money guy mile marker. We actually want your total investable net worth to equal one times your annual income. And if you're just a median income earner in this category, that means that you should have about $55,000 in savings and investments by the time you get to age 30.
11:06 Brian Preston? Well, that's what I want 20-year-olds to know. It's okay if you're aspirational. You know, we tell you, we love for your savings rate to be 25%, but we understand when you're just starting out, it's okay if you're just doing 5% initially, just so you get that employer match or 6% to get load up on the employer match from your 401K. Just do something.
11:24 Speaker 04 That's right.
11:25 Brian Preston? Because a little is going to go a long way. And that's why we wanted to bring it back to, if 20-year-olds are feeling like they watch this content and they feel like they're a little behind, how can they catch up? We ought to give them what they can focus on.
11:37 Speaker 04 Yeah. So what are the things that really ought to consume your attention? Well, in your 20s, we really think it's mostly about behavior. Are you beginning to build and establish the good habits that are going to carry you through the rest of your financial life? And the first one seems so common sense, and yet so many people miss this. Are you living below your means? Are you making sure that whatever you have coming in is more than you have going out? If you're not at least doing that, you're missing out on the very first ingredient of wealth creation.
12:08 Brian Preston? Well, it's discipline. I mean, that's one of the things. If you can, I'll go ahead and tell you, when we work with clients, prospects come our way and we work with clients, you see an abundance of people who have made really good disciplined decisions throughout their entire financial life. If you're constantly running up credit card debt, if you're constantly just making minimum payments, you're never, ever going to get ahead. So I just want to be, I want to give you that stark, honest truth so that you can start living that disciplined life and figure out, how do you create margin in your life? So your money can actually start working and given it that third component, which is the time to build upon itself.
12:43 Speaker 04 I love it. You just said it. So most people that don't live below their means, they do exactly what you said. They start getting in debt. So if you're in your twenties, you're trying to think about what are the things I should focus on? Number one is don't allow your debt to begin accumulating. A lot of folks have to graduate with student loan debt. It's a new reality for our graduates coming out. What we don't want you to do is come out of school and start your career and have student loan debt. And then you start adding the auto debt and then you start adding the credit card debt and then you start adding the consumer debt. And all of a sudden you recognize in this decade, when you should have been building assets, all you were doing was digging a hole. They got deeper and deeper and deeper. So in your twenties, you want to make sure you're not falling into that trap.
13:22 Brian Preston? And that leads right into measure twice on large purchases. This is because you don't want to make a mistake on, I see it all the time, you know, you graduate with college. You feel like, you know, maybe you grew up in humble beginnings. You reward yourself with that brand new car payment. And I see, I mean, we see average American now doing close to 66 months on financing payments over $700. Guys, don't go fall into that consumption trap. Measure twice on those large purchases. Because you do not want to be driving your wealth around. You want to have it in the net worth statement.
13:54 Speaker 04 Yeah. In your twenties, we said, okay, don't live beyond your means. Don't go into debt. Don't screw up the large purchases. How about one do? Here's a big do to focus on in your twenties. Do start saving and investing, even if it's small, even if it seems insignificant. What's amazing about your twenties that even small insignificant numbers, when applied through time, can become incredibly significant. It's wild, Brian. We even come up with this idea, this concept called the wealth multiplier.
14:24 Brian Preston? Yeah. If you think about it for a 20 year old, every dollar that comes into your control has the opportunity to become $88 by retirement. But here's the thing, that excitement, it can also be something that cuts the other way. By 30, you see every dollar has potential to be $23. Still really exciting stuff. But notice by the time you're 47, so a sevenfold increase is still important. But by the time you get to my age, now you're getting below $3.
14:50 Speaker 04 It's not the same.
14:51 Brian Preston? This is why time can be your friend. Or it can be your foe. Make sure you go download money guy.com slash resources are wealth multiplier. To make sure you're on the right side of this.
15:01 Speaker 04 All right. So we're talking about the 401k and how powerful it can be. So for those in your twenties, what are the things as it relates to your 401k that you should really be familiar with that you should really understand? And we think that there's three of them. Number one is your match. Number two is your contributions or what you're putting into the plan. And number three is your investment. So let's talk about the first one first, Brian. Let's talk about the match because this is one I know that gets you super, super excited.
15:27 Brian Preston? Yeah, this is and I've already alluded to it. I even my excitement got a hell too much and overwhelmed me in the fact that I burst it out with, you have to love the free money. Yes, your employer is incentivized to give you matching or profit sharing, or even just you don't even have to put money in. They just put money into your plan. So they get to do even more options with their plan for themselves. Don't sleep on the free money. That is so powerful. That's why it's number two in our financial order of operations.
15:57 Speaker 04 And would you believe that right now the average employer contribution is 4.7%? So if you're someone who's just taking advantage of the match, just putting money into your plan, there's a good chance that your employer is putting nearly 5% in there on your behalf. And this is on, uh, this is often structured as like a dollar for dollar match. If you put in $1, your employer will put in $1 or maybe it's a 50% match. That if you put in 6% of your salary, they'll put in 3%. Either way, you can think about this like a 50% or 100% rate of return on your dollar. So if you're not taking advantage of it, if you're leaving money on the table, you are literally walking away from free money. You already alluded to this, Brian.
16:41 Speaker 04 There's, there's a few different types of ways that your employer can put money into the account. We just talked about this one. It's matching. It's where you have some skin in the game and your employer says, okay, if you've got skin in the game, I'll put money in also. But that's not the only type of contribution.
16:58 Brian Preston? Yeah, we also have non-elective. A lot of people are, you know, if you think about it, it's not uncommon to see safe harbor 401ks. Well, safe harbors give really big flexibility to your employer if they just load you up with the money very early on. In some plans, you have to put nothing in, so you can do non-elective contributions. That means that even if you don't contribute, they'll put money into your plan.
17:21 Speaker 04 And then there's also profit sharing contributions where the employer says, okay, in addition to the matching or in addition to the safe harbor, maybe the firm, the company, the enterprise is doing well, so we want you to share a portion of that. So we're going to put in additional contributions on your behalf. We have one plan, Brian, that is so generous that if you, as a participant, put in 5% of your pay, you actually get a total of 15% going in on your behalf across the matching contributions and profit sharing. So you need to understand all the different ways that your employer can put money into the plan. But then you also need to understand, how do you put money into the plan? What do your contributions look like? And this is generally broken down into two different
18:01 Speaker 04 pieces. Number one, how much do you contribute? Number two, where does my contribution actually go? What part of the plan do I actually put my dollars into?
18:11 Brian Preston? Now, this next one, I got excited, and I'll just go ahead and reveal it for you. We looked into it because Fidelity, once again, was tracking all this data. The average contribution across all ages for 401ks, according to Fidelity, is 14.1%.
18:27 Speaker 04 That sounds amazing. We're like 10% off of our 25% goal.
18:30 Brian Preston? But stop. You can't have a celebration on this because, remember, we showed you just a few slides ago, employers are putting in close to 5%. So if you actually, and by the way, this number, 14.1%, does include the employer contribution. That means the typical American is actually putting in less than 10%. Now, yet, we all want a retirement. We all want to own our time, but yet, we're not willing to put in the effort of actually going beyond that 9%. We can do better than that.
19:00 Speaker 04 And there is some silver lining here. We actually know that 39% of people increase their contribution rate over the past year. So folks are getting better at saving, and we want you to do that, but... Remember, we don't want you to get your order out of line. Brian, can you hold the thing up again? If you have high interest debt, we don't want you focusing on the 401k yet. If you have not fully built an emergency fund, we don't want you focusing on the 401k. If you've not fully maxed out your Roth IRAs, your HSAs, we don't want you focusing the 401k. But if you are in step six and you are following the financial order of operations, this is the great time for you to begin thinking about, okay,
19:40 Speaker 04 how can I start contributing? How can I get better? Maybe I can't do 25% right out of the gate, but maybe I can start at 10% and next year I can go to 11 and the next year I can go to 12 and I can slowly through time increase it and ultimately work towards that 25%.
19:57 Brian Preston? Yeah, I mean, just it's okay if you start with just your employer match. It's just as you get pay raises, as you start, as your income goes up, try to do more. I mean, that's the thing is I encourage people as life happens, as you have more success, make sure that you're also updating those 401k contributions so that it is expanding as well. So you're just not stuck at that original 5% to 6% that you set up once you lined up your first 401k.
20:24 Speaker 04 So that's your contributions in terms of how much you contribute. The other thing you have to think about is which account do I contribute to? Which side of the equation? Because 401ks generally come in two varieties. You can do a pre-tax 401k where you put money in today and you get a tax benefit today and when you pull it out in retirement, you pay taxes. Or you can put it in on the Roth side. I don't get a current year tax benefit, but the dollars will grow tax deferred. And then if I pull them out for qualified reasons or qualified circumstances later on in retirement, I can actually pull them out completely tax free. So the question becomes, how do I decide? How do I know if I do pre-tax or Roth?
21:02 Brian Preston? Well, now, there's several things that go into this. Obviously, your age, you know, this, I will tell you, the younger you are and the more time you can let your money work, that is going to lean towards being coming tax-free growth, like a Roth account. But we also put an income component to it as well. So because if you're starting out and you're not in your peak earning years, More than likely, your tax rate is under 25%. Under 25% tax rate lends itself to being Roth friendly. Meaning that, wouldn't it be great if you could pay really low taxes right now? Let that money compound completely tax-free to take advantage of it? I should probably get in and enjoy and maximize that. However, if you're somebody and your income starts going up and your marginal rate,
21:45 Brian Preston? both your federal as well as your local state that you pay income taxes, if you add up what the next dollar tax for each one of those, that's your marginal tax rate, and it's between 25 and 30%, that's where those other elements like your age and your goals are definitely going to start leaning into... Because like for a 25-year-old who's in the 26% bracket, you probably, hey, that's going to, you might want to go into Roth because you're young. But if you're somebody who's 60 years of age, you might want to lean towards more of the traditional because you'll have opportunities once you quit working to do Roth conversions or something. And then if you're in the high-income situation and your combined marginal rate is greater than 30%,
22:26 Brian Preston? we think that there's potential down the road for you to take the tax deduction now and then later on, once you lose all your earned income, have an opportunity to do Roth conversions or even at least have the opportunity to pay a lower tax rate so it makes more sense, take advantage of the arbitrage of, you know, take the tax deduction now and then we'll figure it out once you get closer to retirement.
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23:01 Speaker 01 Price and participation may vary. Promotion pricing may be lower than meal pricing.
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23:30 Speaker 04 All right, so we're talking about the things you need to know about 401ks. We covered that you need to know about your match, you need to know about your contributions. The other thing we want you to know is about your investments. A lot of times, and it's super sad when we see this, someone won't take an active role in at least making the election in their 401k. So if you're someone in your twenties or your thirties and you're just letting your plan default to the cash option or the stable value option, there's a really good chance that you are missing out on a huge opportunity. Remember, we've already shared the wealth multiplier would suggest that for a 20-year-old, $1 has the ability to turn into $88. Well, that assumes that that $1 is invested, that that $1 is working for.
24:11 Speaker 04 If you have it sitting in a money market or a cash equivalent, that $1 is not going to turn into 88. So you don't have to make this more complicated than it is. A lot of plans have really good, low-cost, target retirement index funds where all you have to do is decide two things. How much can I save? When do I want to retire? When do I think I'm going to need this money? If you can just answer those two questions, you can set it and forget it and let your dollars start growing through time.
24:38 Brian Preston? Yeah, in your twenties, I want you, because you're not supposed to touch this money for decades in the future, we want you to be more aggressive. Don't let the volatility or the news media scare you into being super conservative or going cash only. Consider looking at what the long-term investment opportunity is and be somewhat aggressive with it.
24:55 Speaker 04 All right, Brian, now let's talk about the thirties. Again, Fidelity did this huge survey looking at average 401k balances broken down by age. And according to Fidelity, for those that are 30, the average 401k balance is just under about $35,000 a year. By the time that you get to age 35, the average 401k balance in this country is about $59,000 per year. And for the average 40-year-old right now, the average 401k balance is about $91,000 per year. And so the question becomes, if I'm in my thirties, if I might be in that messy middle stage... Is that how much I should have or where should I be or what should my numbers look?
25:36 Brian Preston? Yeah, let's, you know, it's great that we were actually have pulled up and we have a great guidance here is because we shared earlier that when you're 30 years of age, you know, we say it, fidelity says it, one times your earnings is probably a good aspirational goal to shoot for. By the time you enter into becoming a 40 year old, you know, as you're graduating from 39 to 40, we'd like it to be three times your income. There is a transition as your money starts growing and building. So we could actually put numbers if we knew what the median income was for, for typical workers.
26:08 Speaker 04 So what you're thinking here is, okay, I gotta go from one times to three times. It seems that's a lot. I gotta triple. I gotta triple what's going on. So if we know that the median income for someone in their 30s right now is about $86,000, what are those money guy markers? What are those mile markers that we ought to be hitting? Well, remember, we said that the average 30 year old 401k balance is about $35,000, but we think that your total investable net worth should be closer to 55,000. That was the median income for a 30 year old. Well, by the time that you get to 35, we think that your total invested assets should be about $146,000. And by the time you end your 30s, you should have an average liquid net worth,
26:50 Speaker 04 your liquid net worth should be about three times your annual income. And if we're just going to use the median income of Americans in their 30s of $85,000, that means that your investment portfolio should be a little over a quarter of a million dollars, right at $257,000. So average Americans are not quite aligning with our financial meetings.
27:10 Brian Preston? Well, I think people will go see this is, they're going to immediately yell at the screen, this is where you lost me because they see us go from $55,000 for a 30 year old to somehow 257,000 by the time you reach 40. Guys, I'll, I'll go and tell you, this is the power of compounded growth. You don't have to do this alone. This is not only you putting the money in there. This is about your army of dollars actually putting some money and growing upon itself over time. We have a great case study or example to show you this might be a lot easier so that you're not stuck. Like the typical American avoiding and sticking your head in the sand, you're actually getting in there, getting the money working and letting your compounding army of dollar bills do all the heavy lift as well.
27:50 Speaker 04 Yeah, if you think about that 50, nearly $55,000 that you would have had at the end of your twenties, if you just let that grow at eight and a half percent without adding another dollar to it, just letting those dollars grow, it would grow from $55,000 at age 30 all the way to $128,000 by age 40. What you've done is you are halfway to where you're supposed to, just the dollars that you saved in your twenties got you halfway there. That means that you would only need to have about a 10% savings rate in order to save that additional 50%. Now, we're not suggesting that you drop your savings rate. What we are showing is that if you do the hard work early on, you let your army of
28:31 Speaker 04 dollar bills start working for you, the path gets easier and easier and easier. Now, likely in your 30s, we talk about it all the time, this is the messy middle. This is when life begins to pull you in a thousand different directions. That's why we want you shooting for 25%. But if you did what you were supposed to do before you got to the messy middle, there's a good chance you're going to have freedom and flexibility to navigate the messy middle different than your peers.
28:57 Brian Preston? But we've looked into the data and the research shows that the typical American doesn't start saving and investing until age 33.
29:04 Speaker 04 That's right.
29:05 Brian Preston? So, we've just shown you, if you could come into this whole investment at age 30 with this sum of money, it has the chance to double upon itself over the decade. This is not going to get easier if you stick your head in the sand and defer this. I would encourage you, if you're like the typical American and you're 33 years of age, you're just now discovering this, you can still do it. Your compounding opportunity is massive, but it's not going to get easier. Every day you delay, this is going to get harder and harder. So, make sure you start putting money to work. Go beyond the American 9%. Let's get it up to the 25% that we talk about all the time on the Money Guy Show. There's a reason we want to reach, help you reach your success.
29:47 Speaker 04 So, what are the things that we ought to focus on in our 30s? Well, the first one is... We really ought to focus on optimizing and one of the number one most powerful, most impactful, most important things that you can optimize in your 30s is actually reaching that 25% savings rate. Maybe you don't start there at 30, maybe you're only at 15%, maybe you're only at 18%, but if you can focus on the optimization and focus on getting to 25% as quickly as you can, you will be amazed at how powerful those dollars can be for you.
30:21 Brian Preston? It's also important, this is the age, you've probably gotten a few promotions, your income's going up. You know, we shared in the 20s that this is where, you know, you might be in a lower tax bracket, it makes sense for Roth. Don't sleep on the fact that you probably need to reassess the Roth versus traditional areas. Your income tax rates go up, as your earnings go up, make sure you're staying on top of all that.
30:42 Speaker 04 And then the third thing that we want you to focus on, and this is specifically as it relates to your 401k, is we want you to understand your vesting schedule. Now, there's a good chance, a lot of people change jobs in their 20s, and even in your early 30s, there's a chance that you still might change jobs, change career paths, but you've likely been working and building and you've likely got some dollars that your employer has put into your 401k on your behalf. And you want to make sure before you make a job change, you weigh the costs, the all-in costs of making that decision. And one of the things that employers are able to do in order to incentivize you to stay with them, is they can add a vesting schedule to contributions that they put into the plan, which means that it might not all be yours,
31:27 Speaker 04 day one. There are a few different types of vesting schedules that we see. Now, Brian, you mentioned earlier, you talked about safe harbor contributions. These are contributions that the employer puts in automatically, oftentimes whether you put money in or don't put money in.
31:43 Speaker 04 Most of the time, these are 100% vested. Not every time you'll want to check your plan document because these can have a vesting schedule over a certain amount of time. But most often, these contributions are 100% vested.
31:55 Brian Preston? So that's important. Pay attention. You'll like the word safe harbor. The next thing is cliff investing. This means that you basically go from 0% to 100% but over a certain period of time. And it's a shorter period of time. That's why they, people will do vest, you know, cliff vesting if they, you know, after two years, you go from 0 to 100%. But what's more popular is what's called graded investing. And this is where you'll see every year, you pick up an additional 20% more vesting. So typically after, you know, five years of being there, you know, in six years, you're fully invested, you know, vested in the, the funding from your employer. Understand this verbiage. Understand how this impacts you because it's going to be
32:38 Brian Preston? very important to know how much money you get to keep, but also your career and employment decisions to see if you don't make a bad decision in that, in that decision matrix.
32:46 Speaker 04 Yeah. When you change jobs, there are other costs associated than just the salary that you're losing. So you want to make sure, again, you measure twice, cut once when it comes to making those decisions. All right. So now let's talk about the 40s, Brian's.
33:00 Brian Preston? Yeah. 40s are important because this is, you know, if you're, you're either going to be bitter because you've missed out on what compounding growth, or this is going to be where you start celebrating that your money is starting to grow upon itself exponentially easier, making the work less hard for you in the future.
33:19 Speaker 04 So when we think about average 401k balances, again, this is a study done by Fidelity Investments in the fourth quarter of 2024. The average 401k balance for a 40-year-old in this country right now is about $91,000. For a 45-year-old, the average 401k balance is about $131,000. And by the end of the 40s, by age 50, the average 401k balance for an American in this country is about $176,000. So Brian, as you're thinking about this, as approaching 50, as approaching that mile marker, do you think 176 is where most people probably should be?
33:55 Brian Preston? No, I mean, because this is, I mean, retirement's right around the corner at this point. You're hoping that you can replace not months, but literally years of your life. Your money needs to work harder than you can. And people are quickly, I mean, you're celebrating that you're six figures because you're like, yeah, that's, that would be a nice car, that'd be a nice house. But no, you need to be thinking, no, I need an enterprise value of assets that's going to replace my labor. I don't know that that gets it done.
34:23 Speaker 04 So when you're thinking about your Money Guy mile markers, we know that at age 30, we wanted to have one times our annual salary. At age 40, we want to have three times. And we're ultimately working towards 20 times our annual salary for financial independence. If you're looking for the mile marker, where you ought to be at age 50, across all of your investable liquid wealth, we want you to be at 6.4 times your annual salary. So if we take the median salary for those in their 40s in this country right now, it's about $101,000. So by that metric, if you are the median income earner, where the average American has about $91,000 in their 401K at age 40, we said to have three times the median income
35:06 Speaker 04 at age 30, you want to have about $257,000. So now, as we get into our 40s, we work through our 40s, the average 45-year-old has a 401K balance of about $130,000. If you're following the Money Guy mile markers, we actually want your total portfolio to be worth about $445,000. And by the time you get to age 50, where the average 50-year-old in this country has a 401K with about $176,000 in it, we think that you should be shooting for about 6.4 times your income, which for the median income earner would be about $650,000.
35:43 Brian Preston? Well, you can see how the separation, remember how earlier I said it's a fork in the road moment? Think about for our financial mutants. You come into your 40s with 257,000 or maybe more if you're, if you've really thrown it out there and you're like, watch what happens when this money grows upon itself because when I, I see a number of, we're trying to go from 257 to 648,000 dollars in a decade.
36:07 Speaker 04 That's a lot of movement.
36:08 Brian Preston? That's a wild growth, but then when I back into and have the context of understanding that if I just had the 257,000, by the time I get to 50 years of age, it likely has grown to 543,000.
36:20 Speaker 04 Without saving another dime.
36:21 Brian Preston? And then that means, wait a minute, my savings rate only has to be like 7% and I've, I've still reached the goal. This is why, and I, I tell you, a lot of you are going to watch this and you're going to be behind. Use that as motivation because it doesn't mean that your situation's dire. It just means you have a little bit more work you need to do on increasing your savings and investment rates. So you can catch this up because it's not going to get easier. It's going to get harder as you're starting to lose less and less time for the money to grow and work upon itself.
36:51 Speaker 04 Now, what's beautiful about 401ks is they're not all that complicated. We've covered a lot of the basics of our twenties and our thirties. So what do we begin to focus on in our forties? What are the things that we begin to focus on? What are some of the nuances that may be available to us? One of the things we want you to do is as you get into your forties, we want you to begin fine tuning your specific plan. I mean, we say all the time, we want you saving 25% of your gross income, 25% of your gross income. But as your income changes and as your financial circumstances change, one of the questions we want you answering is, well, can I actually count the match? Can, can I count the money my employer's putting in? Is that part of my 25% or am I supposed to be doing 25% on
37:36 Speaker 04 my own? How do people answer that question? How do we know?
37:39 Brian Preston? Well, it depends on how close you are to the social safety net. So we've, we've gone ahead and defined, we've taken into account a lot of this. If you're a single individual, if you make over a hundred thousand dollars, you need to only count your funding. Now, don't count your employer match. If you make under a hundred, you can count the employer match. That's for single individuals. For married couples, 200. Like I said, it's all tied back to the social safety net. So pay attention to where you are from an income standpoint. If you're under, then embrace the fact that you get to count your employer. Use that as motivation to see if you can keep growing this thing even more.
38:13 Speaker 04 Again, in your 40s, we want you fine tuning. So maybe this is your story. Maybe when you were in your twenties, you just got your employer match. You put in 5% and they put in 5%. Then you got to your 30s, you know what, I'm going to double it. I'm going to start saving 10% of my salary. And you felt so great about that. But now you're in your 40s. One of the questions we want you to ask at this stage of your life is, can I actually max out my 401k? Can I actually go up to the governmental limits that they make available to me to put money in my 401k? And if you're in your 40s, if you're below 50 years of age, in 2025 this year, you can actually defer $23,500 of your salary into your 401k. That's the maximum allowable amount the government's going to let
38:56 Speaker 04 you put in there to take advantage of that tax incentivized growth. So are you taking advantage of that? Or are you leaving some money, leaving some opportunity on the table?
39:06 Brian Preston? I mean, we still want you prioritizing the Roth IRAs, the health savings accounts, because that's step number five of the financial order operations. The tax motivation is very powerful, but it is, I think by the time you're in your 40s, you're probably exceeding step five and you're also in step six, which is hopefully having you max out your retirement options in your 401k.
39:24 Speaker 04 And then as you do that, Brian, you get into step seven, you get into hyper accumulation. One of the questions we get all the time is, okay, if I'm in hyper accumulation and I've maxed out my 401k, I've done my salary deferral, what comes next? What options are available to me?
39:39 Brian Preston? Well, I mean, we always like, in step seven, especially if you're one of these people that thinks you're going to need access before 55 for 401k, 59 and a half for all the retirement, other retirement accounts, besides 457, by the way, that don't have those. But it is one of those things where you might want to have some taxable brokerage accounts. If you're also, if you're a really high income person and you have the right structured account, you might get excited about finding out that you have after-tax contributions, which can set up backdoor Roth conversions, mega backdoor Roth. conversions. A lot of cool planning opportunities. So pay attention as you go beyond 25%. How do we need to structure those accounts to maximize all the tax benefits, but also to reach you and use appropriately or best for you in retirement?
40:23 Speaker 04 Yeah, a lot of people don't realize they think about when I put money in my 401k, I can either do pre-tax or Roth. They don't recognize there's actually a third contribution type called after tax contributions. And even though 23,500 is the most you can put into pre-tax or the most you can put into Roth. In this third type of contribution bucket, you're not limited. You can actually take this all the way up to the section 415 limits of $70,000. So if you are a very high income individual, or you do have an employer that has a very robust plan with after tax options. You, between your contributions on salary deferral, between your employer, safe harbor, or profit sharing, or matching contributions and after tax contributions.
41:05 Speaker 04 You might actually be able to get $70,000 a year into your 401k in a tax advantaged manner. So you want to make sure as you're fine tuning and customizing your plan, you're asking the question, are these types of benefits available in my plan? And if they are, are they something that I should be taking advantage of?
41:26 Brian Preston? Yeah, really exciting stuff from a, from an opportunity to, to plan beyond. Now, Bo, I want to pick on you because earlier you, you said when we got to 40s, you kind of leaned in. And I think that's just old habits because we, we, we've been creating content so long that you look at me as a 40 something year old.
41:41 Speaker 04 Still think about it.
41:43 Brian Preston? However, I'm actually in my 50s now. So it's time to transition. What do 401ks look like for those in their 50s and 60s and even beyond?
41:52 Speaker 04 Yeah. So when we think about average 401k balance, again, fidelity did a wonderful study in 2024, looking at the average 401k balance of folks by age. And we know that the average 50 year old has a 401k balance right now of about $176,000. The average 55 year old's 401k balance is about 222,000, 60 year old, it's about 246,000. And then for the average 65 year old in this country right now, their 401k balance alone is about $250,000. Now again, you know, we said, Our ultimate goal is we're working towards having 20 times our annual income for financial independence. And we check our mile markers. If we're going to stay on this path, we know
42:36 Speaker 04 that we needed 6.4 times our income by 50. That would mean we need 13.7 times our income by 60, and then 20 times by 65. Well, if we know, Brian, that the median income for someone in their 50s is about $110,000 a year, the average American, at least by this metric, is falling drastically short.
42:59 Brian Preston? Yeah, and that's why, I mean, look at the, if we, if we pull up the chart of actually what the spread is between what the averages are versus what we're projecting you should need. Get motivated.
43:10 Speaker 04 Get motivated.
43:11 Brian Preston? I mean, don't be part of the, the statistics of the average American. You want to be beyond average. And we showed how early or on for 20-year-olds, 30-year-olds, just do something. A little goes a long way. Still, in your 40s, you have opportunities to catch up. And then the government has written into tax laws, in your 50s, you get some incentives. So there's all kind of opportunities. Do something today. Don't let these numbers discourage you. Let it be motivation.
43:37 Speaker 04 If you're a median income earner, just for those of you out in podcast world, if you want to hit your number by 50, your total portfolio is about $650,000. By 55, you should be into seven-figure land, a little over $1,400,000. By age 60, about $1.5 million. And then by age 65, if you were a median income earner in this country, you should have 20 times your annual income, about $2.2 million saved up. So as you transition into this 50s and into 50s and beyond, what are the things that you ought to be thinking about, ought to be focusing on? Well, you just said it, Brian. This is the stage where retirement or financial independence is right under the corner. So you really ought to be focusing on landing the plane. What tweaks should I be making that would help me out?
44:21 Brian Preston? Yeah, well, that's what the government, as I already alluded to it, catch-up contributions. You have 50, it's probably the only good thing that you feel better about yourself that you're now in your 50s, is you get catch-up on your IRAs, you get catch-ups on your 401Ks. Don't sleep on these unique opportunities. Opportunities because we've already heard 23,500 is what the government says you can the max you can put into your 401k unless you're 50 or greater and now you can do 31,000 if you're now they even have this crazy super catch up between 60 and 63 you can even contribute up to 34,750 that can actually make a big difference over the long term so take advantage of those unique windows of time that the government is giving you hey a little bit extra that you can put into these plans
45:05 Speaker 04 Dan, as you think about exiting the workforce or making this next decision on this next phase are you familiar with the rule of 55 if I'm thinking about leaving in my 50s should I potentially consider making sure that I do not retire do not leave work before the year in which I turn 55 because if I do it in the year that I turn 55 or later I can actually access those 401k assets before age 59 and a half
45:30 Brian Preston? And then this is also Tom where you know your allocation matters you know this is where we're going to pay attention to tax location we're going to take pay attention to asset location so you can actually have access to what cash when so this is very important to understand and plus you know I don't want you to be a cowboy forever I mean there's a there's a point where you need to dial down risk just because you don't have the time to recover if you go too far out on the risk spectrum
45:54 Speaker 04 And we want you especially in this phase we want you to measure twice cut once because it's not clear how many retirements you're going to have you hope you only have to do it once but you only get one shot at that and it's really hard to get the water back up the hill once it's gone down the hill so have you done the things necessary to make sure you're ready for the stage and ready for this transition a great tool that you can use if you've not done this is have you gone to learn.moneyguy.com and done our know your number course do you understand okay to live the life I want to live and the terms I want to live it at the numbers I want to live it at have I hit my number have I reached the level where I can actually step away from the workforce
46:35 Speaker 04 and be okay if you've not done this work yet you might not be at the place where you can actually sign that retirement notice
46:42 Brian Preston? Well, I think the know your number course is perfect for really people 20 to 50 years of age because it lets you know if you're ahead of the curve behind the curve or right where you need to be I will say is you actually are approaching retirement I want you to consider even taking it to the next level. And that's where there's a reason if you go to moneyguy.com/ become a client, you'll see that we actually have a work with us section. You can, you know, watch a video on, you know, what value we think we offer clients. And this is the part where, you know, humbly, I talk about the abundance cycle. We give you tons of free advice because I know in the beginning, your decisions should just be simple. Is it just do something, make the money work as hard as you do, and you'll be rewarded in the long term.
47:25 Brian Preston? However, as you get more successful, the side effect of success is complications. That's right. And you're going to, you've only had one retirement and you don't want to screw it up because you're now more than likely the CEO of a seven-figure enterprise that you don't want to lose 20, 30% just because you had the wrong allocation. You don't want to pay extra taxes just because you didn't know that you could restructure it this way. All those blind spots are complications that we think are the perfect steps for why you probably want to take a relationship to the next level. So that you can find somebody who's done hundreds, if not thousands of retirements for their, for their clients. So you know, you're getting the best version of your retirement and maximizing your financial life.
48:10 Brian Preston? That's why go to moneyguy.com if you're in the beginning and go to our resources section, all the free stuff. But don't be scared to go to that work with us section because it is one of those things where you either need to own your financial life or if you just let it happen to you, it will own you. And that's why we want you to command your army of dollar bills. I'm your host, Brian Preston, Mr. Bo Hanson, Money Guy team, out.
48:36 Speaker 04 The Money Guy Show is hosted by Brian Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice. All investments involve a degree of risk, including the risk of loss.
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