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The average 401(k) balance for people in their 40s is $407,675, and the median is $162,143.
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For those in their 50s, the balance jumped to $622,566 and $251,758, respectively.
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Thoughtful retirement planning is to increase contributions at age 40, take advantage of catch-up contributions at age 50, and review your investment portfolio and expenses to support early exit from the workforce.
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Retiring early requires more than just hitting benchmarks; you need to be prepared for a longer retirement period, higher medical costs, and limited access to Social Security, Medicare, and possibly a 401(k).
When you reach your 40s and 50s, retirement is no longer a distant thought. You can actually start to imagine it. For some, this includes leaving the labor force earlier than the traditional age of 65 or 67.
But if you plan to retire early, your 401(k) balance will bear an additional burden. Not only do these savings need to last longer, but you won’t be able to use them freely without penalty until age 59.5. This means that, for example, if you plan to stop working at age 55, you will need to develop a strategy to make up for the shortfall in those years with other savings or income.
Seeing how your balance compares to your peers is a useful checkpoint, but planning for early retirement requires going a step further.
|
age |
Average 401(k) Balance |
Median 401(k) Balance |
|
More than 40 years old |
$407,675 |
$162,143 |
|
Over 50 years old |
$622,566 |
$251,758 |
The average 401(k) balance for an individual in their 40s is $407,675, according to Empower. By their 50s, average earnings climb to $622,566. The balance is higher due to longer contribution years, higher income and catch-up contributions at age 50.
However, averages don’t tell the whole story. A few large accounts tilt the average upward. The median balance ($162,143 for those in their 40s and $251,758 for those in their 50s) provides a more realistic midpoint.
For those considering early retirement, the numbers highlight a challenge: Many workers are earning far less than they would need to stop working a year or two earlier.
If your goal is to retire early, the math changes. Your savings must last longer and cover more uncertainties, especially health care and inflation.
Many rules of thumb assume a standard retirement age. For example, Fidelity recommends saving 3 times your salary at age 40, 6 times your salary at age 50, and 8 times your salary at age 60. If the annual income is $85,000, that would be $255,000, $510,000, and $680,000 respectively.
But if you want to stop working early, you might need 8 to 10 times your salary times 50, depending on expenses and lifestyle.
Another guideline is the 4% rule, which is to withdraw 4% of your retirement portfolio in the first year of retirement and adjust for inflation each year thereafter. This means you need about 25 times your annual expenses. So if you spend $50,000 a year, you expect to have $1.25 million saved in retirement.
But the rule is based on market data from the 1990s and assumes a retirement age of 30 years. By 2025, experts now recommend a more cautious approach of around 3.7%, or even lower, especially if you’re more than 30 years away from retirement. For example, at 3.5%, the same $50,000 expense would require nearly $1.43 million. The chart below shows the difference between the $1.43 million goal and the median 401(k) balance for people in their 40s and 50s, which in both cases is still over $1 million:
|
age |
Median 401(k) |
savings goals |
gap |
|
More than 40 years old |
$162,143 |
$1,428,571 |
$1,266,428 |
|
Over 50 years old |
$251,758 |
$1,428,571 |
$1,176,813 USD |
For early retirees, these are not finish lines, but starting points. Conservative planning and saving above your baseline can mean the difference between running out of money and retiring with peace of mind.
It’s important to know that, with limited exceptions, you can’t access 401(k) funds before 59.5 without a 10% penalty.
This means anyone retiring before age 59.5 will need to have a plan in place to cover expenses until those funds are available. A taxable brokerage account, Roth IRA contributions (with penalty-free withdrawals), or other income streams are necessary to make up the shortfall.
Some employers allow you to use your 401(k) without penalty after leaving your job at age 55, a little-known rule known as the “age-55 rule.”
If you want to increase your retirement savings so you can retire early, here are a few things you can do to be better prepared:
Start by projecting your annual expenses and multiply that by the number of years you expect to retire. For someone retiring early, that could mean 40 to 50 years. Build buffers for inflation, health care and unexpected costs. Knowing the size of the gap makes it easier to target savings.
Don’t stop at the employer match, this is a huge advantage. If you can, gradually increase your 401(k) contributions up to the annual IRS limit in your 40s, then take advantage of catch-up contributions when you turn 50. If you’re serious about retiring early, commit to maximizing your contributions consistently, even if it means cutting back on lifestyle expenses.
Because there are penalties for 401(k) withdrawals before 59½, it’s necessary to keep the funds in a taxable brokerage account, Roth IRA contributions, or somewhere else where they can be accessed early, such as a high-yield savings account. These accounts should provide you with sufficient funds until you reach age 59.5.
In your 40s, lean toward growth to build momentum; in your 50s, shift toward protecting what you’ve built. Diversification is even more important when you have a longer time horizon, because market downturns early in retirement (called return sequence risk) can cause lasting damage.
If you change jobs, roll over your old 401(k) into your current plan or IRA. Fewer accounts means fewer fees, less chance of losing track, and easier monitoring of your progress.
Health care is one of the largest expenses in retirement, especially if you retire before reaching Medicare eligibility at age 65. If your employer offers a health savings account (HSA) and you qualify, contribute as much as you can. HSAs enjoy triple tax benefits and can double as a medical safety net in early retirement.
Retiring early is possible, but it requires more than just average savings. That means thinking carefully about how long your money must last, how you’ll pay for health care, and how you’ll weather the years until you can collect your 401(k) benefits without penalty.
Benchmarks and averages are a useful way to check, but if your goal is to leave work early, you’re going to need more discipline than most of your peers. The sooner you take conscious action, the more flexible and secure you will be when you decide to leave work.
Read the original article on Investopedia