How Much Should a 26-Year-Old Have in Their 401k?

When it comes to retirement savings, the amount a 26-year-old should have in their 401k can vary widely. However, setting realistic and achievable goals is key to laying a solid foundation for your financial future.

Setting Realistic Goals

For a 26-year-old, having a retirement account is already a commendable achievement. If you have a year’s salary in a retirement account and an emergency fund, you are ahead of many of your peers. This shows that you are proactive in planning for the future.

Common Guidelines for Retirement Savings

A common guideline suggests aiming to have 1x your salary by age 30. For instance, if you earn $50,000, you should aim to have approximately $50,000 saved in your 401k by the age of 30. By age 26, you might aim to have around half of your annual salary saved, which would be about $25,000 for a $50,000 salary.

Maximizing Employers’ Matches

Contributing enough to take full advantage of any employer match is crucial. Employers often match a percentage of your contribution, which is essentially free money. Starting early and consistently contributing can lead to significant growth due to compound interest over time. Aim to contribute as much as possible, up to the annual limit of $19,500 in 2020, or the current limit.

Managing Financial Accounts

It is advisable to have three separate accounts for different needs: a short-term checking account for paying bills and expenses, a mid-term savings account for emergencies and big expenses, and a long-term 401k for retirement. There is no magic amount to put into your retirement account, but the amount you save now will significantly impact your comfort level at retirement.

Maximizing Contributions

Contribute as much as you can, but aim to achieve the maximum company match. Starting early allows for compounding and can grow your savings significantly over time. Aim to contribute at least 100% of your paycheck or the annual limit, whichever is lower, and spread it evenly over each pay period to ensure you receive the maximum employer match.

Understanding Taxes and Future Projections

Only contribute as much as you can to maximize the company match. The rest should be invested in tax-exempt investments where only the growth of your money is tax-exempt. This decision may depend on your personal belief about future tax rates.

Conclusion: Being proactive about your 401k from a young age is always a smart move. With reasonable goals and consistent contributions, you can set yourself up for a comfortable retirement. Good luck!