How Much Money Do I Need in a 401(k) to Retire?

Start saving now for a comfortable retirement.

You spend your working life building up your 401k balance, but what happens next can be just as critical. Determining how much you can safely withdraw from your 401k, and how large a balance you need to maintain your desired lifestyle, is absolutely essential. A number of things can affect the balance you need to retire comfortably, including your other savings and the availability of guaranteed pensions and other income.

Guaranteed Income

Before you can determine how large a nest egg you will need to build in your 401k, you first need to look at your sources of guaranteed income. You can log on to the website of the Social Security Administration to estimate your future Social Security benefits. If you expect to receive a pension, you can check with your human resources department to see how much you will receive when you retire. Comparing those guaranteed payments with how much you expect to spend in retirement provides a good starting point for estimating how much you will need to save in your 401k plan.

Other Assets

Your other assets play a role here, as well. The more you have in other assets, the less you have to save in your 401k to generate the kind of income you need in retirement. While your 401k is an important part of your nest egg, it should not be the only financial asset you hold. Building a nest egg consisting of your 401k plan, IRA account and personal savings gives you added flexibility, and makes it easier to achieve your post-retirement income goals.

Retirement Budget

Before you can determine how much you need to save in your 401k plan, you first need to know how much you expect to spend when you retire. Working out a retirement budget should be your first step. You can base your post-retirement budget on your current budget, but you will need to adjust it somewhat. For instance, you can eliminate the line item for retirement savings, work clothes and the cost of commuting. But you will have to add additional items, like the cost of individual health insurance and increased expenses for hobbies and travel.

Withdrawal Rate

Financial experts recommend that new retirees withdraw no more than 4 to 5 percent of their 401k nest eggs during their first year in retirement. That means a retiree who needs to generate $20,000 annually from a 401k would need a starting balance of between $400,000 and $500,000. Keeping the initial withdrawal rate as low as possible increases the odds that the money will last through retirement.