The era of pension plans is by and large over. Enter defined contribution plans – 401(k)s, 403(b)s etc. Despite different alphanumeric combos (IRS code), all of these plans have, for the most part, the same recipe: Contribute up to a certain amount, get your employer match, invest. The ultimate goal of each is to accrue enough money through contributions and appreciation to comfortably carry you through retirement.
As pension plans fade into the past, how you manage and contribute to these plans becomes increasingly important. And, the responsibility in doing so is yours.
So, how much income can you count on from your 401(k) 30+ years down the road? Let’s start with three assumptions:
- You contribute the maximum IRS allowable amount – $18,000 plus a $6,000 catch up if you are over 50 years old
- You invest over a 30 year period
- Your investment grows at 7% per year
The output would be $2 million. Using the standard 4% distribution rule, this translates into $80,000 of income in retirement per year.
So, your 401(k) is worth $80,000 per year. But how much will you actually need in retirement? If you are a physician currently making more than $100,000 per year, $80,000 is not going to cut it and you should look for other savings opportunities.