401(k) as post-59 1/2 money: How much do I need?

Mr. Money Mustache posted about how much money is TOO MUCH in your 401(k) last fall and I’ve spent a lot of time thinking about this.

I really like how he defines the money him and his wife put into their 401(k)s as the money that they will spend after age 59 1/2, so it’s really money that you don’t need for quite awhile. (I highly recommend that you read his article and then I’ll show you how to make a spreadsheet to calculate your numbers.) It took me some time to wrap my head around his math, so I made myself a spreadsheet.

My estimation of how much I need to live on, ignoring an estimated mortgage payment, is about $2,250 per month or $27,000 per year. If I assume that I can safely withdraw about 4% per year from my fund (I’m being a bit more conservative than his 5%), then I would need $675,000 in my 401(k) at age 60 to live for the rest of my life.

Next, I needed to figure out how much my 401(k) would be worth when I’m 60. So I made a spreadsheet (I <3 Excel) with the following columns:

  1. Age
  2. 401(k) balance
  3. Age 60 balance

I started Age at my current age and then incremented it up about 10 years to start.

On the first line of the 401(k) balance column, I inputted my current 401(k) balance. Then on the second line, I entered:

=B2*1.05+17000+BASE_SALARY*EMPLOYER_MATCH

where:

  • B2 is the cell containing the current balance
  • 1.05 represents an assumption that the balance will go up on average 5% per year after inflation
  • 17000 is the current maximum yearly employee contribution to a 401(k) plan
  • BASE_SALARY is my annual base salary before taxes, used to calculate the match amount (no, I’m not telling you exactly what my gross monthly pay is)
  • EMPLOYER_MATCH is the percentage of my base salary that my employer matches on my contributions

Then I dragged the B3 cell down to the last age value (B12).

And least but not last is the fun part! Now we add in the formulas for the “Age 60” column.

=B2*1.05^(60-A2)

where:

  • B2 is the cell containing the 401(k) balance at the age in A2
  • 1.05 represents an assumption that the balance will go up on average 5% per year after inflation

Based on these numbers, I estimate that it will take me about 4-6 more years to have “too much” money in my 401(k). That’s funny because I also estimate that it will take me about 4-6 years to pay off a mortgage after investing 20% of my gross income for retirement, including some of that going into my 401(k). Sounds to me that 4-6 years will be quite a magical time!

Readers, have you ever done this calculation? How far off do you think you are from having “too much” in your 401(k)?

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7 thoughts on “401(k) as post-59 1/2 money: How much do I need?

  1. While we’re young, I think it’s difficult to have too much, because we can always just stop contributing cold-turkey later and still be better off.

    That said, unless you make a lot of money (which you do), there are competing wants to your money. It would be foolish to max out one’s 401(k) and other retirement savings if it meant giving up health or other areas of quality of life. (Say you work in a gov’t job and make 40K/year… you probably don’t want to put away 15.5 in your 457 plus however much you’re allowed in your 401K plus 5K for the roth. Instead you will probably want to eat meat occasionally.)

    If you do make a lot of money, and that money increases every year, and you’re a saver, at some point you’re going to run out of tax-advantaged savings vehicles and wish you’d used these earlier opportunities. If your income drops, then you’ll be happy you saved so much for retirement already because it will allow you to cut back on future saving.

    • I agree, but there are various reasons (that I won’t go into) that would make me consider using a taxable account instead of a tax-deferred account after a few more years. Those ideas could change in the next 5 years and then I would stick with the tax-deferred account.

      It’s looking like this year I will be able to put very little into the Roth IRA’s front door, so you’re definitely right on the point of running out of tax-advantaged savings vehicles. That’s a factor for continuing to use the 401(k) as well. Plus, it’s kind of nice to save the taxes on the money going into the 401(k), which actually last year bumped me down pretty close to the bottom of the 28% tax bracket when you factor in the standard deduction and personal exemption.

      I’m going to keep maxing out my 401(k) for the next few years, but that’s definitely something I would re-evaluate once a year as things change.

  2. I’ve calculated it and it never seems enough. Probably a combination of my real (post-inflation) growth assumption being too low because I’m a pessimist and the fact that I live in an expensive city.

    In case you want to build up your model, I’ll throw you some curve balls for consideration. I’m sure you’ve probably already thought about all these though:
    – is that $27k after-tax? Not being familiar with the US tax system, will you be taxed if you withdraw from a 401k? If yes is the answer to both of those questions, your estimate is too low.
    – if you ever need to ‘loosen’ up the amount you need to save, you can always adjust the math to reflect that the amount needed at age 60 can take into account the future growth of your 401k into retirement. As you withdraw money in retirement, the fund is still growing, albeit on a base level that reduces after every withdrawal. Conversely, if you don’t adjust the amount needed downwards to reflect the future growth, your estimate becomes conservative and you’ll have more than you need as a contingency.
    – you should increase the $27k (or however much you determine you need in retirement) each year by your inflation assumption, since the real prices for everything you’re buying now will also increase by that amount (simply speaking). In other words, you may need $27k now, but if inflation is running at 2%, and you’re 30 today, you’ll need c. $49k/yr ($27k*1.02^30) by the time you are 60 to maintain the same standard of living (I do recognize that you made some justifiable simplifying assumptions with your growth rates however, as they are post-inflation).

    Keep up the saving and the ever interesting posts. :)

    • $27,000 for the year isn’t all that cheap with no mortgage payment ;)

      If I was to withdraw $27,000 from a 401(k) in today’s tax brackets:
      * The first $5,950 is the standard deduction.
      * The next $3,800 is the personal exemption.
      Those two reduce my taxable income to $17,250.
      The first single tax bracket is 10% of $8,700 = $870. Then 15% of ($17,250 – $8,701) = $1,282.35. So the total (federal) taxes on $27,000 would be $2,152.35.

      I agree that some of these calculations are a bit on the simplistic side. It’s still kind of interesting to run them now, but it’s scary to think that one day I will be running them and then not working anymore based on them…

      I’d be curious to re-do this math in another year and see how I feel exactly on all of it :)

  3. I have thought about this but have not changed anything beyond saving as much as we can for a few reasons: it’s really hard to estimate how much money we will need in retirement, it’s so great to have tax advantaged savings, and I think it makes sense to save as much as possible as early as possible. We can always stop saving if we get older and really think we have ‘too much’. However, at this point in my personal finance journey, maxing out my 401k from day one is probably the best thing I’ve done.

    So what are you going to do in 4-6 years when you are all set?

    • I’m definitely loving maxing out my 401(k) this year and last, though I think it was the right decision to just put enough in to get the match in my first year working full-time.

      I’m not quite sure I would do in 4-6 years when I’m all set or if I will even be all set, to be quite honest :) A lot could change in the next 4-6 years, but I think it would be pretty cool if zero incomes were needed when I have kids if I do so. Otherwise, our society is so structured around working during business hours on weekdays, that I’m not quite sure what I would do if I decided I didn’t want to save any more money. I also don’t know if I could survive mentally without working!

  4. i would imagine that after 4-6 years, the tax deduction aspect will be more important to you as I would imagine you would have quite a bit of taxabale investments anyway. That’s tax deferred space you can never get back. i don’t know why one would stop saving it if they’d just have it in a taxable brokerage anyway, asusming it’s money they won’t need for years and years, they’ll just needlessly being paying more taxes on their income and their investments.

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