401k - I am 28 years old and contribute to my employers 401k plan, I currently contribute about $500 a month?

Question

I know everyone has a different idea where you should be and how much you should have at retirement... but how much "typically" should a 28 year old have right now. What is the low end, medium, and high end of what your 401k should be? Also lets say I have 1 million in my account at 65, do i get taxed on it when i pull money out? what is the average tax? thanks!!

Answer 1

For a good book on retirement investing, check out http://www.invest-for-retirement.com . Appendix A addresses the issue of figuring out your Nest Egg goal and annual contribution amounts.

Here are some free calculators you may find helpful. Be sure to carefully read the assumptions used for the calculations. Most of these ask you to input a nominal return. (I would suggest using a nominal return of 7 - 7.5% in your working years, and maybe 5 - 6% nominal return in retirement. But play around with the numbers.) Use several calculators to get a consensus on your answer.

- http://www.bloomberg.com/invest//calculators/retire.html
- http://money.cnn.com/pf/retirement
- http://moneycentral.msn.com/retire/planner.aspx
- http://apps.nasd.com/investor_Information/Calculators/nasd/retirementcalc.aspx (This site calculates your contribution amount and shows the incremental amounts for each of your working years, based on inflation.)


I cannot say how much a 28 year old should have. This is a very individualized answer, and only you can decide this.

To answer your last question: A 401(k) is contributed to with BEFORE TAX money. This means you are not taxed on your contributions in the year your make them. Also, your earnings are tax-deferred. However, this means that any money you withdraw in retirement is taxed. (Withdraws made before age 60 incur an additional 10% tax penalty, on top of your tax bracket.)

When you withdraw money from a 401(k) or a Rollover IRA, the IRS counts this income and you will then pay taxes based on your tax bracket. It's like your 401(k) withdraws become your "paycheck" in retirement, and pay the same taxes that someone who makes that much from their job does.

No one can predict what the tax rates will be when you retire. This depends on what Congress does. However, many retired people wind up in a lower tax bracket compared to their working years.

Any money that is not withdrawn remains in the account and is not taxed. You are only taxed on what you withdraw. However, be aware that after age 70 you are required to take at least some money out every year (Required Minimum Distributions).

Answer 2

First of all, you're doing very well to put that much in. You might be in a position now to save quite a bit, which you're doing, if your expenses aren't real high. Compounding will let that money grow well, so you should have enough for a quite comfortable retirement.

There's no magic number of what your 401K should be at retirement. One million in today's dollars would give you a very safe $50K a year without going into principal, so you wouldn't have to worry about outliving your savings. In 40 years or so when you reach retirement age, it's hard to tell what $50K will mean, but will be a lot less than that same dollar amount today.

Yes you get taxed on 401K money when you pull it out. The percent depends on your total income - it's taxed the same as wages except you don't pay social security and medicare tax on it. Average tax is probably under 15%, but can be higher depending on how much income you have that year.

Answer 3

That's great at 28 that you are already contributing towards a 401k. Yes, when you withdraw from your 401k, you will have to pay taxes. That's one of the primary benefits of participating in a 401k in that those earnings are not taxed initially, which allows your money to compound at a faster rate. As far as how much to contribute . . .

If your employer offers a percentage match, contribute at least to the match. Otherwise, however much you can reasonable afford is the right approach.

Keep in mind that early withdrawals (before retirement age) result in penalties in addition to the taxes.

Answer 4

Sean, I can't give you exact numbers, but here is a great to "play" with those numbers... check out http://www.finance.cch.com. Click on the link that refers to "financial calculators" and you'll find some awesome programs that will help you figure all the variables that fit your situation and how much you can expect to need.

The good news is you're starting early and have lots of time before age 65. Even if you're starting small, with the right investment portfolio, you can gain ground over time. Just be patient and keep adding to that 401(k). (Add a Roth IRA or other investment vehicle if you can too.)

Under current law, every penny you pull out of the 401(k) after age 59 1/2 WILL be subject to income tax. So if you take out, say, $50,000 to supplement your income, you will be taxed on the entire $50,000. The actual tax will be based on your income bracket at the time you take it out at age 65 (whatever Washington dreams THAT up to be then...)

Good luck saving!

Answer 5

starting right now @ $500/month until you're 65 you should amass, assuming 6% ROI, $814k

Depending on how much you have saved right now, you may make it to a million. You'll probably need more than that though. You need to account for inflation and health care costs.

Answer 6

Tax on your withdrawal is 10% right now (don't know if
that will change before you're eligible) -- Have you checked into
a Roth account ? you pay taxes when you put it in but it's
tax-free when withindrawn, including earned interest.