Is Your 401(k) on Track for a Millionaire Retirement?

Are you on pace to hit your retirement goals with your 401(k)? A million-dollar retirement fund sounds great to everyone, but it might be more important than you think. Every million dollars saved should produce about $30,000 to $40,000 of annual retirement income, according to the 4% Rule and its latest revisions. Still, most people aren’t anywhere near this — the median 401(k) balance is around $65,000 for 65-year-olds.

Want to stand out from the pack and retire with a big pile of cash? Consider the following key points to see if you’re on track.

Here’s what really determines the amount in your retirement account

There are a lot of moving parts here, but your 401(k) balance is ultimately based on your income, savings rate, and rate of return.

The amount of money that you save each year is equal to your annual income multiplied by your savings rate — pretty straightforward. If you have an especially high income, you can probably get away with spending a bit more. If your household doesn’t take home as much, then you’ll have to try to save a bigger chunk of each paycheck.

That’s only part of the puzzle, though. Any capital that you save into your 401(k) can be invested for growth. This is especially helpful in your early working years because you have more time to take full advantage of the growth opportunities provided by the stock market. The best investments for your 401(k) depend on which stocks, bonds, mutual funds, and ETFs are available in your employer’s plan.

Regardless of the specific options available, you should prioritize growth when you are young and slowly transition to a lower-volatility investment strategy as you approach retirement.

Doing some over-simplified math

So how does the average household get on track for millionaire retirement? As mentioned above, there are a few variables at play here, but we can fill in some averages.

The median household income for 25-year-olds is just under $60,000. For people who contribute to a 401(k), the average contribution is around 7% of annual income. That number might actually be even higher after adding in employer matches, according to data from Vanguard.

If we just go by these numbers, the median household would save over $4,100 into its 401(k) each year. Over time, average income rises, and those annual household savings would climb to nearly $6,500. If someone followed this path starting at age 25, then they would require a 6.5% compounding rate of return to hit $1 million by age 65. If that same person didn’t start accumulating 401(k) savings until age 30, then they would require an 8% annual rate of return.

Age
Annual Household Income
Annual 401k Contribution at 7% Savings Rate
Start Age 25, 5% Return
Start Age 25, 6.5% Return
Start Age 30, 8% Return

25
$59,106
$4,137
$4,137
$4,137
$0

30
$71,181
$4,983
$30,848
$31,986
$4,983

35
$82,093
$5,747
$69,448
$74,792
$39,206

40
$89,251
$6,248
$122,232
$137,076
$93,249

45
$92,563
$6,479
$191,417
$224,291
$174,599

50
$92,088
$6,446
$280,201
$344,292
$294,665

55
$85,394
$5,978
$392,092
$507,252
$469,600

50
$74,624
$5,224
$531,117
$726,635
$722,638

65
$63,143
$4,420
$704,141
$1,022,664
$1,089,754

Data source: U.S. Census. Calculations by author.

Of course, these are only helpful guidelines to help you understand how much you’ll need to save and grow to achieve your retirement goals. If you’re falling off track, you’ll have to make adjustments to recover.

How to get back on track

If you’re not on pace to hit your $1 million 401(k) goal, then you have to increase your income, your savings rate, or your rate of return. It’s not realistic for most people to simply increase their income, especially in the short term. Perhaps one member of the household could work more hours if they are part-time or unemployed, but that’s impractical in many cases. It might be necessary to adjust your retirement goals if you can’t increase your income.

It’s not always a great idea to lean too heavily on improving rate of return, either. Make sure that your account is allocated the right way to balance growth and risk. You should strive to maximize investment returns, given your risk tolerance and time horizon. For many people, especially younger savers, this means that you can modestly outpace major market indexes over the long term.

Expecting long-term returns much higher than 10% usually requires too much risk or volatility. Volatility is especially risky for older people who might not have time to recover from a market crash before retirement. Don’t get sucked into a dangerous situation where you have to invest irresponsibly to get the right amount of growth.

Most people should focus first on improving their savings rate. The average personal savings rate is around 9.5% right now in the U.S. That’s artificially higher due to stimulus, and people have historically retained closer to 5% of what they earned.

You can improve your savings rate by sticking to a household budget, increasing the automatic 401(k) contributions, and ensuring that you’re taking full advantage of any 401(k) match offered by your employer. If you don’t have a retirement plan at work, you can save regularly into an IRA instead.

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