What is the ideal 401k Deferral %?

The optimum 401k percentage to save is the age old question that the industry often tries to answer. Is it 12%, 15%, 9% or 6%? Or is it do as much as you possibly can? Don’t forget the advice of do at least enough to get your company match. Unfortunately, when you look at this question from a more logical and analytical perspective you quickly realize that there is no one answer. The fact is that too many things can impact this very important decision. Are you deep in mortgage debt or is your house already paid off? Do you rent versus own? Is Aunt Sally leaving you an inheritance of $600,000 and her original Van Gogh? Do you have 12 Gold Bars buried in the backyard? Will you work part-time in retirement? Will you live in Beverly Hills, California or Tulsa, Oklahoma? Will you drive a Mercedes-Benz or a Kia? Will your hobby in retirement be juggling axes, surfing Mavericks or planting flowers?

Mavericks Wipeout https://youtu.be/uReDn0gI30I

All of the above are going to have a varying impact on how much you need to save for retirement. To many plan participants this all seems too complicated, but it really doesn’t have to be. A few factors will need to be considered to find the mystical number you are looking for. What will your income replacement percentage be? What is your mortality date (when will you kick the bucket)? What will your actual retirement age be? 65, 70, 75? What is the investment return percentage you will expect to achieve between current date and retirement and then in the retirement income phase. All of these things factor heavily into your planning. Does this seem intimidating? Too much to take in? Take a deep breath………we can break it down into small bite-size chunks.

Think about it….you are already are pretty darn good at calculating living costs. You do it right now! You somehow figure out what you need to pay your mortgage/rent, you allocate the proper amount to put food in your belly, cover your water and electric bill, your insurance payments, your car payment and the gas that thing chugs on a monthly basis. Give yourself some credit, you are pretty good at this stuff. Well….retirement really isn’t that much different. You are going need to cover all of those same expenses in whatever your new retirement world will look like. The only difference is that in theory you will not have a paycheck….so you will need to create your own paycheck from your retirement savings.

Make sure you have a general understanding of the following concepts:

Income Replacement % – AKA how much will you need annually in retirement years
Mortality Date – AKA When might you kick the bucket
Retirement Age – AKA When do you stop working for a paycheck
Assumed Investment Return – AKA what kind of investment performance will you get
Retirement Withdrawal Rate – AKA how much $$ will siphon from your account each year

Hopefully the above gives you some good mile-markers and concepts that can help you. If not, Fidelity took a stab at a simple calculation where they came to the conclusion that you need 1X income at 30, 3X income at 40, 7X income at 55 and 10X income at retirement age 67 and that is kind of a cool, simple way to look at it.

Take advantage of the tons of awesome calculators online that can help you start this process. Dig in and start planning so you can make your retirement a reality!

Fidelity Concept 
https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire

Voya My OrangeMoney Calculator
 https://www.voya.com/tool/orange-money-retirement-calculator#results

Nerd Wallet Retirement Calculator
https://www.nerdwallet.com/investing/retirement-calculator

 

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