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What if you always maxed out your 401(k)

by retirebyforty on March 20, 2013 · 60 comments

in investing, saving

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How much do you have saved in your 401(k)? If you max out your 401(k) contribution every year since you started working, you would have a good size retirement portfolio by now. However, if you are like the average worker, your retirement account balance is woefully low. Fidelity Investment analyzed nearly one million investors’ retirement accounts and here is the result.

average retirement balance

This study combines the IRA and 401(k). The average balance is $225,600 as of Dec. 31, 2012. The result looks A LOT better than their last study which looked at just the 401(k) balance. The average 401(k) balance is much lower at $77,300. This makes sense because a lot of people roll over their 401(k) accounts to an IRA when they change job. You could also contribute to both the 401(k) and Roth IRA if you qualify.

This actually looks a lot better than I thought. The average balance of the 65-69 yr old bracket is nearly $400,000. That’s not bad especially if you have social security benefit and a little pension. It is still a little low because retirement can last 30 years or more these days. If you withdraw 4% from $400,000, then that’s only $16,000/year or $1,333/month.

On the table, you can also see how much people contribute to their retirement accounts by age. Younger folks do not contribute much, but that’s natural because they don’t have as much income. This made me curious and I thought I’d figure out how much someone would have if they maxed out their 401(k) contribution as soon as they started working.

Maxed out every year

Note: I have our worker contribute the max contribution divided by 12 on the first of every month. The investment is VFINX, the Vanguard S&P 500 index fund. I used VFINX’s price on 1/2/13 to figure out the 401k total (red line below.)

max out 401k every year

Here is how to read this graph. Figure out how many years you have been working. If you started working in 2002, then that’s 10 years you could have maxed out your 401k (from 2002 to 2012.) If you contributed the max every year, then you should have around $207,287 in your 401k account by now.

Where are you?

Here is the full table. Figure out how many years you worked and see if you have at least that much in your retirement account.

what if max out 401k every year

It’s clear that by maxing out your 401k, you’ll be much better off than the average Fidelity investor. I didn’t even add any company matching to this. With company matching, your 401(k) balance should be quite a bit higher than my table here. You can also invest in your Roth IRA and the combined account should be in even better shape.

You can also see the magic of time on this table. If you maxed out $7,313 in 1988, it would have turned into $67,101 today ($727,518 – $660,417.)

Here is the same graph with Fidelity’s data added.

max out 401k

Closing

Of course, every 401(k) plan is different. Your retirement plan might not have very good investments or your fees might take a big bite out of your total return. I still think it’s worth contributing the maximum to your 401(k) every year. The contribution is auto deducted so you don’t even miss it.

I maxed out my 401(k) contribution a few years after I started working. My IRA is inline with this table though so I guess my 401(k) plan wasn’t too shabby. How does your retirement account compare to this table? Are you ahead or behind?

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{ 60 comments… read them below or add one }

The College Investor March 20, 2013 at 12:33 am

I’ve never maxed out my 401k, so I’m way behind. However, I’ve always fully taken advantage of my employers match and then contributed to my IRA.

I think maxing out your contribution is great if you can afford it. However, in our case, we max my wife’s since her plan is much better than mine (with matching and investment choices). We only do mine to the company max, then invest elsewhere.

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Dividend Growth Investor March 20, 2013 at 6:46 am

I am way behind on the 401 (K) front, as I only contribute enough to get the employer match. The rest is in taxable accounts, which gives me more control and is perfect for someone who wants to retire early. Dividend investing is very difficult in a 401 (K) plan..

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retirebyforty March 20, 2013 at 3:07 pm

That works for you so it’s great. You’re right, most 401k doesn’t have good dividend funds/stocks.

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My Financial Independence Journey March 20, 2013 at 2:40 am

According to the chart I’m behind. But then again, I only invest enough in my 401k to get the match. However, if I add in all the money in my true retirement account (my taxable investments), I’m crushing the averages.

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retirebyforty March 20, 2013 at 3:01 pm

That’s great! It’s good to have your money in several places.

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Money Beagle March 20, 2013 at 4:47 am

I recently went four years without getting a raise, which definitely put me behind in my quest to slowly build up the contributions to the level where I’d be maxing out. I’d hoped to be there next year, but now it’ll probably be 1-2 years later considering the delay. I still consider myself lucky though all things equal. I have a good job, pays well, and work with a lot of great people, and there are other benefits I absolutely love.

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retirebyforty March 20, 2013 at 3:02 pm

Sorry to hear that. I hope you’ll get a raise next year. Cost of living is getting higher. Good luck with maxing out in the next few years.

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Glen @ Monster Piggy Bank March 20, 2013 at 5:59 am

I don’t add anything at all to our super fund (Australias version of the 401K) above what the government forces us to put in. My reasoning – There is a good chance that the money in that account will never be mine due to the amount of rule changes that happen ever year.
I have already see the age for me to be able to access that money increase from 60 to 65. What happens when Australia does what Cypress is doing and taxes 10% of everyone’s money? I would rather invest my money than leave it to get eaten by inflation in a bank account or stolen by a greedy government.

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retirebyforty March 20, 2013 at 3:04 pm

I’ll have to research your super fund more. Can you access that investment earlier and take some penalties like the 401k?

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Glen @ Monster Piggy Bank March 20, 2013 at 11:47 pm

Nope, not unless I am terminally ill or need the money to continue living due to being unable to work. It is a massive scam that I want no part in.

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Greg March 20, 2013 at 6:03 am

I am doing better than I thought for my amount of years in the workplace. But, I am considering pulling back so that I can invest in additional real estate. I, personally, have seen better returns in rentals than I have with my 401k, although, I’m sure part of that has to do with when I came into the workplace.

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retirebyforty March 20, 2013 at 3:05 pm

I like rental real estates too. It’s good to have money in both stocks and real estate. Good luck with both!

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Mid West March 20, 2013 at 7:02 am

Age: 29
Combined 401k & IRA: $227,742.17

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SavvyFinancialLatina March 20, 2013 at 10:08 am

Wow!!! Great job Mid West!

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retirebyforty March 20, 2013 at 3:08 pm

Wow, you are way ahead. Congratulation!

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Leigh March 20, 2013 at 7:20 am

My plan is to max the 401(k) out so long as I’m working with a W-2 job. (And the 401(k) plan isn’t absolutely terrible.) I’ve finally got my balance above $50,000 now, so I think I’m doing pretty well at 24! I could probably honestly stop contributing to it after age 30 and still have a very healthy balance at FRA. I’m a little behind that chart since I only contributed enough to get the match in my first year working, but I’m still doing pretty well.

One of my favourite things to do is to convince fresh college hires how awesome the 401(k) and Roth IRA is! Most of them are math-smart enough that it doesn’t take much convincing to at least get the full match :D

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retirebyforty March 20, 2013 at 3:09 pm

That’s great at 24! How long have you been working? 3 years or so? That’s right in line with my chart.

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Srini March 20, 2013 at 7:22 am

Love your blog. Excellent post!

Can you please tell if these studies considered the affect of 2008 crash in these numbers?

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retirebyforty March 20, 2013 at 3:09 pm

Yes, they all take 2008 into consideration.

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roberto anji September 21, 2013 at 8:51 pm

I think the reason the 2008 crash did not affect the numbers is because by 2012 all the losses had been erased by that time. If this analysis had used 2008 instead of 2013 as the last year of investment the total saved would be much less. At the end of 2008 VFINX would be 83 instead of 140 and using a rough approximation the total would be less by approximately that fraction, i.e. 727518 x (83/140) = $431314, so it matters which year you use as the last year of investment. That is why they say you need to start moving out of stocks and into bonds as you near retirement. It would be nice to see the same calculations where someone maxed out for 25 years but retired in 2008, 2009, 2010, 2011 and 2012 and compare these. Of course using sep 2013 (today’s month) the chart above will look even better.

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retirebyforty September 22, 2013 at 6:52 am

You are 100% correct. I’ll write an update at some point.
The key take away here is to keep investing and don’t panic and sell, right? In retirement, you need to cut spending during the bad years so your funds will have a chance to recover.

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SavoirFaire March 20, 2013 at 7:23 am

Interesting. Regardless of how much I save I always feel I’m behind – just can’t get there fast enough. Based on these numbers I’m way ahead of the game. I’ve always pushed myself to save a lot for retirement on the advice of my father many years ago. The only downside this caused was when I wanted to buy a house I didn’t have enough for a 20% down because all my money was tied up in retirement funds. This forced me to take PMI and I utterly hate throwing money away like that for nothing.

A tip I would give everyone too is that if you plan on maxing out your 401k savings is to take a percentage that maxes you out earlier in the year. This way if you max out around October, you’ll have more cash in hand for the Holidays because no more will be taken out for the rest of the year. Also in these unstable times, if you are let go, you’ve put more money away then you would have if you took the max/paychecks.

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retirebyforty March 20, 2013 at 3:11 pm

Great tip about maxing out earlier. That’s what I did in 2012 before I quit my job. By maxing out earlier your money also has more time in the market. That’s the key to stock market investing. Sorry to hear about the PMI. Hope you can get rid of it soon.

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SavoirFaire March 21, 2013 at 8:59 am

I got lucky with the PMI, only had it for 1yr. I did a refi that dropped my mortgage by 2% and the housing market was going up so fast that between what I put down and increase in my home value I had enough to get rid of PMI. I went from a 30yr to a 15yr and payed only $100 more a month. Just did another refi recently dropping it another 2% and it didn’t cost me a cent, some special government program. I’m pushing myself to accelerate my payments and rid myself of my one and only debt. The stock market has been so great lately that I’m taking a lot of profits and putting them into my mortgage. I certainly won’t RB40 (past that already) but I’m hoping to retire within the next 10yrs .

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retirebyforty March 22, 2013 at 3:19 pm

That’s great to hear. I hated PMI and made it a goal to never pay that fee. Great refi!
Good luck with your retirement plan.

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M.L February 17, 2014 at 2:54 pm

One think to watch out for if you have an employer match, if you front load your 401K, you may not get all of your match.

http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/

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retirebyforty February 17, 2014 at 5:08 pm

Wow, that’s interesting. I haven’t had that kind of plan.

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Sachamama April 9, 2014 at 5:15 pm

The maxing out 401k early in the year scheme didn’t work out for me. And may not for many people. Reason being : my company matching occurs on a per paycheck basis. So if I don’t contribute for the last few months of the fiscal year, there is no company match ( = wasted money!)

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Nick March 20, 2013 at 8:09 am

Wow that is crazy to see how much of a difference maxing your contribution makes!

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retirebyforty March 20, 2013 at 3:28 pm

I should have added the fidelity line to my graph too. I’ll do that now.

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Josh March 20, 2013 at 8:32 am

One thing I recently ran into with a change to working at a mega-corporation was the HCE rule. I would love to see an article on one of the financial blogs regarding HCE. I had certainly never heard of it before and finding information is tough.

Basically, I am no longer allowed to provide the legal annual maximum and reduced to a smaller amount . Very frustrating when you run into a new rule that reduces your savings plan.

– Josh

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retirebyforty March 20, 2013 at 3:34 pm

I did a quick search and it sounds like that’s the company’s choice, correct? I need to research more. I guess bloggers don’t write about this because they are not affected. :) My old company has many HCEs (as defined by the IRS) and I didn’t run into this problem.

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John S @ Frugal Rules March 20, 2013 at 8:45 am

Wow, crazy how much of an impact starting early and even when you start in the workforce can impact what you have in the future. It all comes down to time and doing what you should be at the outset. We did not start early enough and are doing all we can to throw as much as possible at retirement saving.

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retirebyforty March 20, 2013 at 3:36 pm

That’s what I thought when I looked at the charts. People who started working in the 80s and saved a lot should be doing quite well now.

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sin camisa March 20, 2013 at 9:11 am

The key word in the first paragraph is “average”. There are a handful of Americans with millions; and millions with only $25K or less in retirement savings. It would be nice to find out what the median is. Also, of course, this applies only to folks with Fidelity accounts. Most of my friend do not even have retirement accounts.

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Steve March 20, 2013 at 11:19 am

The fact that it only applies to Fidelity accounts is key. That means that it certainly excludes those without any accounts at all. Also Fidelity does not even have a representative sample of all 401(k) holders. For instance, I’ve had Fidelity as my 401(k) provider when I worked at a major company; but at smaller companies I have tended to have other, higher fee providers that I assume offered to run the company’s 401(k) plan for “free” (meaning, by pushing the costs on to the employees).

I also wonder what maxing out a 401(k) truly meant in the past. When I started working my employer only allowed a certain % max in addition to the dollar max. That seems less common today but I haven’t been able to figure out if it was an IRS rule in 1999 or just my employer’s choice.

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Steve March 20, 2013 at 11:32 am

Apparently, the EGTRRA of 2001 changed the 415(c)(1)(B) defined contribution limit from 25% of eligible compensation to 100% of eligible compensation. So, there was a legal reason at the time for my employer to limit 401(k) contributions to a percentage.

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retirebyforty March 20, 2013 at 3:40 pm

I think that’s just the employer’s choice. My old employer change the % match every year depending on how well they did. I suspect Fidelity accounts are in better shape than smaller companies’s plans. Employees in bigger companies probably have more stable lives and can save more in general.

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retirebyforty March 20, 2013 at 3:36 pm

You are right, but it still illustrate my point about maxing out the 401k. :)

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krantcents March 20, 2013 at 10:12 am

Thanks to some really good investing in rental property, I exceed your tables. When I started there were no 401K, IRA or Roth IRA. I started with a Fortune 100 company that had profit sharing etc.

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retirebyforty March 20, 2013 at 3:38 pm

That’s great! I always thought people older than me had quite an advantage with the stock market. It hasn’t been doing as well since I started working in 96.

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SavvyFinancialLatina March 20, 2013 at 10:13 am

I started work full time in June at age 22. I have accumulated $10K in 401K and $3K in ROTH IRA. Husband nothing right now :( His work doesn’t offer a 401K.

Although I want to max out my 401K, we want to gather enough cash to buy a house.

Any raises I accumulate will go to my 401K over the years until I can max it out.

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retirebyforty March 20, 2013 at 3:38 pm

Great job so far. Keep at it and you’ll get there. :)

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Johnny Moneyseed March 20, 2013 at 11:28 am

We don’t have a 401k program at work. We do have a retirement plan, but there is no matching. I tend to just max out both my wife and my Roth IRAs every year and put the rest of our investments into taxable accounts.

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Tony@WeOnlyDoThisOnce March 20, 2013 at 11:39 am

Really interesting and clear graphics. Great post!

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Mike March 21, 2013 at 6:56 am

I think it really does depend on the company you work for and if they offer anything decent. Some employers still offer decent plans, others do not. So doing the necessary research is essentially before trying to max out a retirement plan at the company that you work for.

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Michael Jones March 21, 2013 at 8:07 am

Saving for retirement is so important and so many people either don’t do it or don’t care until the 11th hour. What exactly is it that is so important your forego your basic future needs? Hopefully tables and charts like this serve as a wake up call to people who still have some time. The last thing we need is an entire generation of people retiring who need more government assistance. Social security was never meant to be the bailout plan for a nation, it was only intended to be supplemental. That’s not even going into what I think is going to happen to SS in the coming years. Let’s look out for ourselves for awhile people, then we can be confident we’ll be OK.

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JC @ Passive-Income-Pursuit March 21, 2013 at 10:37 am

Just counting my 401k and rollover from my previous job I’m behind by about $30k, but if you add in my Roth’s and brokerage I’m ahead by $87k so I think I’m doing fine. The only thing I really like about the 401k is that it’s a way to automatically save since that money never comes into your hands, but I personally am only investing enough to get the match now. Of course I’ve started focusing on FI/ER so I can’t have all of my savings tied up in the 401k and other retirement vehicles. The 70-75 year old bracket from the Fidelity study is encouraging because all you hear about is the retirement crisis. I think too many of the studies that look at that aren’t accounting for the fact that the baby boomers should receive their full social security payments and have at least some form of pension plan assuming they didn’t cash it out upon leaving the job or retirement. I’ve seen several that just look at 401k balances and of course the boomers will be behind on where they should be because they didn’t have the 401k option their full working career.

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retirebyforty March 22, 2013 at 3:21 pm

I like auto deduction too. You never see the money so you don’t miss it at all. I think you have a point about the 70-75 bracket. The current retirees have social security and other resources. I’m pretty sure 99% of retirees will do just fine. They’ll just have to figure out how to live on less money. I’m pretty sure they won’t starve.

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Integrator March 30, 2013 at 5:40 am

Like some of the early posters, I only contribute to my 401k to the extent of the match. The rest all goes into taxable accounts. Between taxable and tax deferred, I’m probably somewhere near the $700k mark. 401k is only $85k mark. I’m in my mid 30’s, but I started investing very early :)

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retirebyforty March 31, 2013 at 7:46 pm

Great job! $700k is an enviable position for someone in their 30s.

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CBSAustintexas May 18, 2013 at 10:19 am

I do 16% into my 401k for over a year now, my employer matches up to 5k a year but limits you to 2500 a half. I also have been able to do 10% employee stock purchase, where they escrow my funds for 6 months and I can take an immediate 15% discount and sell my stock to perk up that amount I escrowed. I also try to max the Roth IRA if possible. 98k at 33.

Its tricky at first and took about a year to really be able to spend money when I turned on those savings vehicles……. and requires some debt freedom to get by with that much being put aside…..but once those 6 month ESP catch up and you will have no consumer debt but mortgage.

I have good equity in 2 homes (700k) too and want to pay off the remaining 400k I owe between the 2 in the next 12 years. I see them as possible annuities that require maintenance but can give me 4-3k a month in rental income. Thats real market security/insurance and back up if I need it.

16% for life and pay off my mortgages is all I worry about.

I also do the 16% to just because I don’t want the government taking more of my money from me forever in taxes…..Its still in my pocket and allows me borrowing power against the bank of me should the need arise.

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Strick June 13, 2013 at 4:59 am

Never had a 401k. Went for many years with employers offering no 401k, so all i could do was the ira (i never quite understood why having lousy job benefits should also prevent me from access to retirement savings accounts above the much smaller ira limit, why couldn’t I just put 15K into my ira?). So I ended up saving a lot in taxable accounts and paid off my mortgage.

Now that I’m self-employed (which frankly I had the guts to do b/c of a paid off house) the limits have increased ridiculously (solo 401k+sep-iras) so i am effectively moving money saved in taxable into those now. It looks from the table that i would have more than maxed out a 401k since 2001 if that was an option so can’t really easily compare performance.

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steve October 5, 2013 at 1:04 am

I’m 38 with $60K in 401K and my wife has about $50K. From a previous job I have a guaranteed pension of $1,300 a month at 65. Realistically, how bad of shape am I in?

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steve October 5, 2013 at 1:06 am

Also, I’m now putting in about $12K per year into 401K.

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retirebyforty October 5, 2013 at 9:04 am

Do you have other savings? You are not doing too badly if you plan to retire at the usual age – 60 or so. It will be hard to retire early though. You need to ramp it up a lot if you want to retire at 50 or just figure out some ways to make money on the side.
Good luck!

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stoutboy March 4, 2014 at 12:02 pm

You use averages for your charts, but those figures are skewed by those with very high account balances. A better data point would be the median. That would give us a better yardstick.

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Momofone September 25, 2014 at 3:53 pm

I just found this post today. I’m way behind on the curve (I’m 32). My husband doesn’t contribute at all, and my company doesn’t match or offer any sort of benefits. I have put away what I can, but my balance is less than $6,000. I do own my own house, but I am saddled with undergrad and grad school debt. What types of jobs offer retirement matching?

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seetha November 27, 2014 at 10:31 pm

I am 44 and have 450K in 401k. Got laid off from work 2 weeks ago after working for 15 years. Always maxed out my 401k ever since I started working at 29. My husband is in workforce, making 6 figure salary. How much my 401k will be like in 15 years (when I am 59) if I don’t work any more? Am I any where close to be in decent shape?

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retirebyforty November 29, 2014 at 11:52 am

I think you are doing pretty well. If you can avoid withdrawing from your 401k, you should in a pretty good shape in 15 years. I think you’d have at least double what you have now. Try to contribute more if you can.

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