There are two types of people: those focused on setting up the perfect retirement, and those who prefer never to think about retirement at all. Most people fall into the latter category. The awareness that we are aging is part of what makes us human. It is difficult to think about and is often the trigger for an existential search for meaning.
Unfortunately, retirement is something you need to plan for well in advance if you want to be comfortable in your later years. Without adequately planning for retirement, you can find yourself struggling to make ends meet when you are no longer able to earn money. Alternatively, you may have to work deep into your old age to make up for what you need.
For this reason, it is worthwhile participating in a 401(k) set up by your employer. If they offer a plan with matching contributions, you are particularly incentivised to take part. A 401(k) eats into your income every month, but it is well worth it for the security it will give you for the future.
But how much do you need in your 401(k) to ensure you’re comfortable later on? Does your balance compare favorably to the average American’s and is that even enough?
401(k) Balance: The Average American
The average American with a 401(k) has a balance of $141,542. However, this number is skewed by those on the higher end. The median balance stands at just $35,345.
These numbers may have you feeling more anxious about your retirement account or more at ease. But without context, these numbers don’t mean much. A balance of $35,345 is great for someone in their twenties. They still have plenty of time to work on growing that balance. For a sixty-year-old, on the other hand, a balance of $141,542 is fairly low.
Looking at your own 401(k) balance may end up confusing you for this reason. It may look like a lot, but will it be enough when you retire? If it looks too small, will you be able to save up enough in time?
There’s no easy answer to these questions, primarily because they depend on a number of variables that you simply cannot control. Let’s take a look at what you have to think about.
How Much Will Your 401(k) Grow?
This is an impossible question to accurately answer, and you have to rely on past precedent when determining how much you can expect your 401(k) to grow. The growth of your 401(k) depends on where and how it is invested, as well as the economic realities around us.
With stocks plunging and a recession looming, now is not a great time to calculate growth. Chances are that your 401(k) will see less-than-ideal growth over the next few months. But that may turn around and in the years ahead we could see great prosperity.
It’s generally wise to temper your expectations. Looking at the worst case scenario is not necessarily useful, but figuring out what you’ll have to work with if your 401(k) sees limited growth will help.
Will The Cost Of Living Rise?
2022 has seen the cost of living rise at an alarming rate. There are a number of factors that have contributed to this, including once-in-a-lifetime events. In other words, it is perfectly possible that the cost of living will dip again.
But what if it only continues to rise? If this happens, your 401(k) may not cover all your expenses at retirement age. If there are events which drive up inflation once you have already retired, you may struggle to live on your retirement funds.
As with the growth of your 401(k), there is not much you can do about this.
What Can You Do?
That may sound a bit bleak, but it should not discourage you. You still have the opportunity to increase your 401(k) by acknowledging these possibilities. As a general rule, if you can save more money towards retirement every month, do so. The more you put in your 401(k) now, the more you will have at retirement age.
Alternatively, you can diversify your savings. If you have a good grasp of investing, you may choose to put extra money in riskier investments that may see higher growth. You’ll still have your 401(k) savings that are reliable, but you’ll also have the opportunity to build further wealth that will see you through your retirement years.
Retirement planning is crucial, as you will have few options once the time creeps up on you. Start saving if you have not already, and consider diversifying your portfolio if you have a knack for investing.