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Is Your 401k Enough For Retirement?

Planning for retirement can feel confusing and overwhelming. How is it possible to make financial plans for a time that is so far into the future? What will the future even look like, let alone cost?

Saving for the long run is so important, but is notoriously difficult to do. You may feel like you’re on track, saving and investing, but it’s hard to know for sure. Are you saving enough? Investing enough?

You’ve got a 401k and feel like overall, you’re making good decisions. Maybe you are even maxing the amount that you add to your 401k each year. But there’s still a lingering feeling of doubt.

That’s because you know that people are living deep into old age, enjoying longer retirements, and in general, not saving enough for these retirements. You want to be sure that you are not one of these people.

Here, we will walk through the mechanics of 401k investing (such as the 401k retirement age and a hypothetical 401k retirement withdrawal rate) and the proper use of a 401k account.

Then, we’ll dig into details for anyone who has ever wondered, “is 401k enough for retirement?” and “how much money in a 401k is enough to retire?” and give solutions for people who want to do and save more.

How Does a 401k Work?

A 401k is a retirement account that a person can access through their workplace, often offered as a workplace benefit that may provide an employer match. Though historically you could only access one through your job, nowadays a self-employed person can open up what is called a Solo 401k account.

A 401k is a qualified plan that offers several options to contribute money. The most common way that people contribute to their 401k is by making pre-tax contributions.

This means that you do not pay income taxes on the income that you contribute into the 401k, but you will pay them later, when you draw the money out to use in retirement. The idea is that you might be earning more as a working person than you will be spending as a retired person, and therefore in a lower tax bracket as a retired person.

Why is this important? When you are making retirement spending plans, you need to remember that you’ll have to account for income taxes coming out of any amount you plan to spend from tax-deferred plans such as a 401k. For example, if you are planning to take $80,000 from your 401k each year, plan to pay income taxes on this amount.

In addition to the tax savings when you contribute to a 401k, the money invested within a 401k is allowed to grow free from capital gains taxes. Capital gains taxes are levied on the growth of investments that are not in qualified plans, but your growth in a 401k avoids these taxes.

Each year, a person can contribute up to the allowable limits as designated by the IRS. The 401k contribution amount is reviewed each year. Sometimes, it is adjusted upwards for inflation. In 2018, the annual 401k contribution maximum was $18,500, but was increased to $19,000 in 2019 .

The catch with a 401k is that you typically can’t access the money without penalty until you are 59½ years, the 401k retirement age. At age 70½ a person is required to take a 401k retirement withdrawal in an amount calculated by the IRS, and that amount is called the Required Minimum Distribution.

How Much Do I Need to Save in Retirement?

Before we can talk about whether saving in a 401k alone is enough to retire from, one must assess, roughly, how much money is needed to live off of in retirement. As could be expected, this calculation is hard to do because it’s a moving target. Still, there is a general method you can use as a starting place.

To begin, determine your replacement rate . Your replacement rate is how much money you’ll need to live from, each year, in retirement. It’s called a replacement rate because it is the amount of money you will need to replace your working income. For example, you may want to live off $50,000 or $100,000 in retirement; it all depends on your wants and needs (and then add $5,000 per person which is roughly what the average retiree spends on healthcare expenses each year).

If you plan on receiving a pension or social security in retirement, then you should subtract that amount to get your overall replacement rate. To put social security in perspective, the average social security benefits replaces roughly 40% of pre-retirement earnings, but the more money you make the less of an impact social security will have.

Next, multiply the replacement rate by 25. This is how much money you should aim for in retirement. Why 25? Because it is the reverse of taking 4% from the total retirement amount. According to personal finance experts, 4% is the amount that you can withdraw from a retirement portfolio without running out of money over a 30+ year period of time. Your aim is to get to a place where you are living off the portfolio’s investment returns.

Here’s an example using a calculator and a pen. Let’s say you have $2 million saved for retirement. Using the 4% rule, you could take $80,000 from your account each year.

Next, let’s do that calculation in reverse. If you start from knowing that you want to spend $80,000 each year, then multiply that number by 25 to get $2 million.

It should be noted that the 4% rule is a great place to start but far from perfect in determining exactly how much money you need for retirement. For example, the 4% rule was based on historical returns.

This means that 4% withdrawals would not have resulted in running out of money assuming history repeated itself. Therefore, it’s always advantageous to work with a financial planner to determine your unique needs and how your plan would perform under various market circumstances.

Is Saving In A 401k Enough?

Is 401k enough for retirement? As you can see, it’s hard to say whether saving in 401k will be enough for every person in retirement, across the board. Every person is going to need a different amount in retirement, and so the number feels like a moving target.

There are three common reasons why people should consider supplementing their 401k savings with other types of accounts.

First, as discussed above there are contribution limits on 401k plans, so if you need or want to save more than the contribution limit you will need to save somewhere else. This is especially common for high income earners, workers who started saving later in life, or those trying to achieve financial independence at a younger age. Therefore, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401k limits.

Second, many people contribute to their 401k plan by making pre-tax contributions. As discussed above, this means a tax break now but will lead to paying taxes when you take the money out.

The fact is that no one knows where tax rates will be in ten years let alone 30 years from now when you are retired. Therefore, it might make sense to leverage a individual retirement account so you have a pool of money that you can withdraw from in retirement that you would not pay taxes on.

Third, the idea of achieving financial independence at younger ages is gaining traction among younger employees. As discussed above, qualified plans have restrictions on when you can withdraw money without paying a penalty. Therefore, it might make sense to leverage an after-tax account so you have a pool of money that you can withdraw from, without having to worry about penalties if you access prior to 59.5.

So the simple answer is that saving in a 401k may be enough, but there are some very good reasons to leverage other vehicles.

What More Can I Do?

No one says that you can only save for the long-term in your 401k account. These accounts simply happen to have some tax advantages over saving and investing in a typical brokerage account.

As discussed above, there are some very common reasons to leverage a Traditional IRA, Roth IRA, of after-tax account. To get started, you should think through your goals and figure out which one of those account types make the most sense.

Next, you’ll need to decide how to invest the money. When you are saving for retirement, the typical fees that are charged by most finance companies really add up. That is why investing without fees with SoFi Invest® can be so valuable to younger investors.

You can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest to supplement your 401k savings.

Ready to get serious about your retirement saving goals? Open a SoFi Invest account to start saving for your future.

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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Automated and advisory services offered through SoFi Wealth LLC, an SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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Choosing the Right Target Date Funds for Retirement

Target Date Fund Basics

Target date funds are becoming increasingly common when it comes to saving for retirement. A target date fund is a mutual fund with a passive mix of investments curated based on when you’re likely to retire.

They are also sometimes referred to as “set it and forget it” funds, and are relatively popular investment options because they are fairly easy to understand and offer a decent return on investment. You simply put your money in a fund with the target date you plan to retire—and you don’t have to think about it on the daily.

Target date funds surpassed the $1 trillion mark in 2017 —meaning that over $1 trillion in our retirement savings are now invested in these funds—and about nine in 10 employer retirement plans now offer target date funds as an option. Target date funds are, simply, funds organized around a target date for retirement.

For example, a 2050 fund means you are hoping to use those retirement funds in 2050. The idea is that by picking a fund aimed at a specific date, the mix of investments can change as you near that date.

This means you might have riskier investments with the potential for greater return earlier in the fund’s life, when retirement is decades away. Your investments gradually become less risky as retirement nears.

However, it should be noted—as with all investments—target date funds are not without inherent risk. You can lose or gain money if the stocks, bonds, or mutual funds you’re invested in go up or down. The return on investment is never guaranteed.

Additionally, even if two funds have the same target date (or similar names), it doesn’t mean they’re the same. The underlying strategy, risk, and asset allocation varies among the best target date funds.

How Target Date Funds Work

Typically, target date funds are mutual funds with a passively managed mix of assets. A mutual fund is a portfolio of stocks, bonds, and securities. You buy into the fund, as do other investors, essentially pooling your money and allowing you to buy a mix of assets you might otherwise not be able to purchase as an individual. Passively managed means you’re not actively trading stocks and securities.

How a specific target date fund shifts its asset mix over time is called its “glide path.” You’ll probably want to research the glide path before committing to a fund. You’ll also want to consider how much risk you want to take. Even though target date funds generally become more conservative over time, the specific risk and asset allocation varies from fund to fund.

How to Pick the Best Target Date Fund for You

The best target date funds are the ones that match your needs, offer the right level of risk for your desired return, and have low management fees. The average target date fund asset-weighted expense ratio for 2017 was 66 basis points—which means 0.66%. And the typical investor pays 0.47% in fees because so many target date funds come from low-cost providers.

That same report found that Vanguard Group, Fidelity, and T. Rowe Price make up nearly 70% of target date fund assets. In addition to considering fees, here are some other issues to weigh when picking the best target date funds for you.

Pick the Right Target Date

You can choose the year you’re hoping to retire, but it’s not a requirement. If you want to be slightly more conservative, you could consider a target date that’s sooner than you plan to retire.

However, you should make these choices consciously (and plan accordingly—don’t pick a date sooner than your actual retirement and then be surprised when there’s not as much return as you want).

And check in regularly to update your target date as necessary—something most people don’t do. One research paper analyzed 34,000 participants in target date funds and found that investors were more likely to pick a target date ending in “0” rather than one ending in “5,” simply because it’s easier to round to zero.

Assess Your Risk Tolerance

A big question with any investment—and target date funds are no different—is how much risk you want and are willing to tolerate. Your risk tolerance can also change over time, and you may want to change the mix of your investments as that happens.

Do you want your target date fund to carry you to retirement or through retirement?

Some target date funds are “to” retirement, meaning they’ll hit their most conservative allocation at the target date and then won’t change much once you retire. But other target date funds are “through” retirement, meaning they continue to adjust and rebalance their mix of funds even after you retire.

Check in on the mix of investments and the fund’s glide path

It’s probably not a great idea to really “set it and forget it.” You’ll want to check in periodically to ensure your fund still meets your needs. Although many employers may automatically enroll you in a target date fund, it doesn’t mean you have to stay in the fund.

If you’re going to want to be more actively involved in investing for your retirement or more aggressive than a traditional asset allocation strategy, then a target date fund might not be right for you. Additionally, if you’re going to need or want more customization, then you might want a different investment product.

Before you decide on products and investment strategies, think about what your financial plans are and your goals for retirement. As a first step, use our retirement calculator to figure out how much you should be saving.

Investing with SoFi Invest®

It’s never too early—or too late—to take control of your retirement savings. If you’re ready to start actively preparing for retirement, consider investing with SoFi Invest. When you open a invest account at SoFi, you’ll gain access to a team of financial advisors who will work with you to create a long-term financial plan. You can get started with as little as $100, with no SoFi management fees.

Ready to invest for your future? Check out SoFi Invest today.

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SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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