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How Much Will My 401k Pay Me Per Month?

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Retirement can be a blessed time in your life. However, in order to ensure that you get your money’s worth, you must aim to save for it optimally. Your expenses in retirement can rise in some areas and drop in others. For instance, while you may not commute to your office every day, you will likely travel more to see your kids and grandkids. And while you may not spend on coffee on your way to work, you may have increased health expenses. In addition to this, you will also have to deal with inflation. A $100 bill from today may not hold value 20 years from now. Inflation was over 8.5% in mid-2022, and if these figures keep up in the future, you will need to accumulate money prudently to cover your basic and non-essential needs in retirement.

There are many ways to prepare for retirement. You can invest in stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), real estate, and others. You can also invest in dedicated retirement accounts, such as the 401k retirement account and the Individual Retirement Account (IRA). The 401k, in particular, can be very useful in retirement planning. To learn more about 401ks, their contribution limits, taxability, and more, consult with a professional financial advisor who can guide you on the same. However, before you start, you must know the answers to “what is the 401k” and “how much will my 401k pay me per month”. Keep reading to find out more.

What is a 401k retirement account?

A 401k retirement account is an employer-sponsored account that a company may offer its employees. It is a tax-advantaged account that lets you contribute to your future expenses in retirement. Contributions to a 401k can be made directly from the employee’s salary, subject to the limits set by the Internal Revenue Service (IRS). The employer can also choose to match the employee’s contribution. This is not mandatory. However, in most cases, companies do this to ensure employee satisfaction and retention. This also improves the company’s attrition rate and boosts productivity.

The contribution limits for a 401k are set by the IRS and may change every year. These are fixed, keeping in mind inflation and the changing needs of investors at large. As of 2022,

  • Investors under the age of 50 can contribute up to a maximum of $20,500 per annum.
  • Investors aged 50 years or more, can make an additional catch-up contribution of $6,500 per annum and make a total contribution of up to $20,500 + $6,500 = $27,000.
  • The maximum joint contribution by both the employer and employee is $61,000 if the account holder is under the age of 50.
  • The maximum joint contribution by both the employer and employee is $67,500 if the account holder is aged 50 years or older.

There are two types of 401k accounts that you can use based on taxability:

1. Roth 401k account: 

A Roth 401K account enables you to make after-tax contributions and then get tax-free withdrawals when you retire. This means that you pay tax on your contributions in the present, and your withdrawals are tax-exempt in retirement. Roth 401ks do not have any mandatory withdrawals in retirement. So, you can use your money as you see fit. The only rule to keep in mind is that you must hold the account for a minimum of five years and be at least 59.5 years old at the time of your first distribution to make a tax and penalty-free withdrawal.

2. Traditional 401k account: 

A traditional 401k enables you to contribute pre-tax dollars. So, your withdrawals are taxed in retirement. The tax is levied based on your income tax slab for the year you make withdrawals. However, since you owe tax on your withdrawals, a traditional 401k has Required Mandatory Distributions (RMDs) from the age of 72. You must make these distributions to avoid a penalty.

How much will my 401k pay me per month?

The 401k per month distribution can vary and is dependent on a number of things. Your withdrawal rate, savings amount, age, inflation, etc., can impact your monthly return. If you are frugal in your distributions in the early years, you may be able to secure the better part of your retirement corpus for the later years. However, if you withdraw the majority of your money at the beginning of retirement, your older years may be spent with a scarcity of funds.

Having said this, most financial experts recommend keeping a 4% retirement withdrawal rate. The 4% rule states that you can use up to 4% of your total retirement savings corpus in the first year of retirement. You can then add the inflation rate for the subsequent years and continue your withdrawals accordingly. This can be a convenient way to ensure that you do not run out of money and are able to enjoy a financially secure retirement.

Here’s an example:

Consider a scenario where you are 55 years old right now and plan to retire at the age of 65 and are assuming a retirement that lasts 20 years. Your current annual income is $100,000, and you have $150,000 in your 401k account so far. If you contribute up to 15% of your income to the plan, i.e., $15,000, and your employer contributes 3% to the plan, i.e., $3,000, you will be able to save up:

  • $535,403 if your portfolio offers a conservative return of 5.00%
  • $669,486 if your portfolio provides a moderate return of 8.00%
  • $843,900 if your portfolio offers an aggressive return of 11.00%

So your estimated monthly income at retirement can be

  • $3,929 with a conservative return of 5.00%
  • $4,912 with a moderate return of 8.00%
  • $6,192 with an aggressive return of 11.00%

However, if you choose to buy an annuity with your retirement money, you can also receive a different monthly income depending on the rate of return from annuity plans that currently range between 2.70% and 4.60%. 

How to maximize your 401k per month distribution in retirement

Here are some things you can follow to get the best of your 401k:

1. Choose aggressive investment options:

As explained in the example above, your 401k per month distribution can broadly differ based on your choice of investments. The return on investment between a conservative and an aggressive portfolio can be as high as a whopping 6%. So, be very careful in your choice of investments. If you are young, you will have a high-risk appetite and can keep a mix of stocks, ETFs, Guaranteed Investment Contracts (GICs), equity mutual funds, etc. These can help you target a higher rate of return. You can also consult a financial advisor to understand the right mix of investments based on your needs and wants.

Having said this, it is also important to diversify your investment portfolio. Diversification can be an integral key to financial success. So, try to keep a mix of different investments in your 401k. While aggressive investment options can attract better returns under favorable conditions, it is essential to include some low-risk options, like certificates of deposits, money market accounts, bonds, etc., to balance out the risk.

The asset allocation in each instrument can differ based on your age and goals. So, try to invest more in equity when you are young and then gradually move to debt as you age.

2. Start saving early:

Investing early gives you extra time and an edge. When you start saving from a young age, you are able to create a higher lump sum for your future. The stress or burden of saving money at a later age is also reduced, and you can live a more relaxed life. Additionally, considering the fact that a 401k may offer the employer’s match, starting sooner also amplifies the extra money coming from the employer’s side. Compound interest can further bring this up to a considerable amount of profit.

3. Maximize your contributions:

This is perhaps the easiest thing you can do to maximize your distributions. The IRS allows you a certain cap on contributions every year. If you match the maximum limit annually, you can enhance your overall savings. Moreover, if your average 401k contribution per month reaches the prescribed limit and your employer further meets your contribution, you can stand to earn more in the long run. The employer may contribute up to a percentage of your salary. No matter what this may be, it can sum up to a significant sum in the end. So, never underestimate this.

4. Avoid early withdrawals during rollovers:

The age limit for 401k withdrawals has been restricted to 59.5 years by the IRS. Any withdrawal before this can result in a 10% penalty and income tax. So, make sure to never withdraw your money before the maturity date. Additionally, you must also keep in mind to roll over your 401k from one employer to another when you change jobs. It is normal to change jobs in today’s times. Most people switch to new companies to grow in their careers. However, in the process, they end up neglecting their 401ks. A job change does not have to impact your 401k. All you need to do is roll over your 401k to the new employer and continue contributing as before. Talk to your old employer and ask them to roll over the money instead of handing over a check to you to eliminate penalty fees and income tax. Besides, avoid the urge to withdraw your money yourself when you change jobs. This will also add unwanted fees and taxes. You will lose a good chunk of your savings and use them in the present when they should have been used in retirement. Moreover, you will also lose the opportunity to earn compound interest in the future. 

Another important point to consider when you switch jobs is to negotiate your 401k benefits with your new employer. The 401k is a part of your employment benefits. So, talk to your new company and negotiate their match. The higher the employer’s match, the better it can be for you.

5. Lower the associated costs:

The investments within your 401k may charge a fee for administration, management, etc. The fees can differ for different investment options, depending on whether they are actively or passively managed, the plan administrator, etc. However, high costs can ultimately eat into your profits. So, make sure that you pick the right options after evaluating their associated costs and then build a portfolio.

6. Talk to a financial advisor:

A financial advisor can be beneficial in overall financial planning. So, getting help from one is highly advised. In the case of a 401k account, the financial advisor can help you understand the latest contribution limits, withdrawal rules, penalties, etc. The financial advisor can also help you with the right mix of investments according to your risk appetite and goals. Moreover, they may be more aware of the costs involved, like expense ratios, Net Asset Values (NAVs), administrative and processing fees, etc. They can also analyze the investment’s past performance, future return potential, and more.

7. Follow the RMD rules:

RMDs are mandatory distributions that you must make from the age of 72. In the case of a traditional 401k, your taxes are pending until you make your withdrawals. So, if you leave your money in the account, you have to pay the penalty on it. This can be up to 50% of the RMD amount. So, make sure that you understand the schedule for your RMDs and draw your money on time. Moreover, stay on top of any changes in RMD rules. And, if you do not wish to follow RMDs, consider converting to a Roth 401k. However, this can trigger tax liabilities at the time of conversion. So, make a choice after careful consideration only.  

To conclude

Your 401k per month distribution is dependent on your average 401k contribution per month. So, the more you contribute to your account, the more money you will have, and the higher your distribution will be. The 401k is one of the first investment options that most people are acquainted with as you get it at your place of work. So, no matter what, try to make the most of it from a young age. Having said that, it may not be recommended to solely depend on your 401k. Retirement expenses can be on the higher end, so try to include other savings and investment options like the IRA, Social Security benefits, life and health insurance, mutual funds, index funds, bonds, and others. Also, aim at creating a well-diversified portfolio and adjust the risk according to your evolving risk appetite.

Finally, you can also consider the possibility of hiring a financial advisor for help. A professional can bring in a fresh perspective and help you plan for your golden years with better clarity. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.