How Much Should You Invest In Your 401K?

You’ve figured out how to budget, destroyed all of your debt, and built up a solid emergency fund with up to 6 months’ worth of expenses.  You’ve arrived, and now comes the fun part!  It’s time to finally start building some serious momentum and investing in retirement.

According to a recent survey conducted by the Employee Benefit Research Institute, 57% of working Americans have less than $25,000 saved for retirement.  This includes 28% of the individuals who had less than $1,000 and 17% who had between $1,000 and $9,999.  But guess what?  You’re already ahead of the majority of Americans, and you haven’t even started saving for retirement yet.  You’ve set a solid foundation for your financial house and now you can finally begin growing your net worth.

Not many people can embrace the idea of cutting back their lifestyles and becoming disciplined enough to sprint through the first 3 steps of our plan with a focus on the future.  Give yourself a huge pat on the back!  You’ve settled for the basics and lived frugally to accomplish a goal…you want to get rich.  Anytime you want to accomplish something big in your life, you need a plan to make it happen.  You have OUR plan; let’s get started!

Simple is Effective!

Right now, you want to invest 15% of your overall income into your 401K sponsored by your employer and if your employer doesn’t have a 401k you should invest in a Roth IRA.  I want you to invest in your 401K first because it is important to take advantage of every tax advantaged account the U.S. Government gives you (This will help lower your taxable income and hopefully get you into a lower tax bracket).  You’re allowed to invest a MAXIMUM of $18,000 in your 401K during 2016.  *This DOES NOT include your employer match!* Your employer match is gravy on top of your $18,000.  If 15% of your income happens to be more than $18,000 you can look into contributing the rest into a Roth IRA.  The maximum contribution for a Roth is $5,500.  Contribute until you hit 15%.

Many of you may be asking, “We just paid off all of our debt and we’re only investing 15%?  And the answer is yes, we are only investing 15% of your income because we want to make sure that you have money left over to pay off your house QUICKLY!  Once that house is paid off you’ll be able to invest A LOT of money and build some serious wealth.  We’ll talk about this in Step 6.

Time + Compound Interest= FREEDOM!

Now you just have to be patient.  Continue making your contributions whether the stock market is up or down and let time work its magic.

I also want you to understand that no matter what, do not take your money out until you’re retired.  If you do, you lose the power of compound interest.

Anyone Can Retire Rich

Hypothetically, if you start investing at 30 years old and you have a household income equivalent to the national average of approximately $50,000, you can retire a millionaire.  Here’s how:

  • You start with $0 in savings but contribute 15% of your income for 35 years.  15% is $625 a month.
  • Assuming an average compounding interest rate of 8% per year you’ll have $1.396 million dollars at the end of 35 years.
  • If you happen to average a 10% interest rate over the course of 35 years you will end up with $2.236 million
  • What if you only have 25 years to invest?  No problem, you’ll be fine.  You’ll still have over $800,000 and that doesn’t include what your house is worth.

Do you think 10% is impossible to achieve?  It’s not.  The stock market has averaged a growth rate of just about 12%.  There are plenty of mutual funds that can be found with a track record of 12% average growth.  Sure they have down years but they have more positive years.  The down years are an example of why you shouldn’t sell.  When stocks are dropping in value you want to buy MORE!  Realistically, I like to plan on an 8% return. If it’s more? I’ll be surprised and happy.  If it’s less?  I won’t be too far off.

P.S. Have any questions?  Leave a comment/reply below and I’ll get back to you as soon as possible.

*If you like talking about Money, Paying Off Debt, Building Your Net Worth and Retiring Early…This is the place for you!  Subscribe to receive emails of new blog posts!!!

2 thoughts on “How Much Should You Invest In Your 401K?”

Leave a Reply