Are Your 401(k) Savings Enough For Retirement?

Five questions for determining whether you're on the right track with your retirement savings.


For many Americans, their 401(k) plan is their primary vehicle for accumulating assets for retirement. But is that enough?

For 2011, the maximum annual 401(k) contribution is $16,500, not including employer-matched contributions. If you are at least 50 years old, you can contribute an additional $5,500. Your plan may impose lower limits, so check with your plan administrator.

If you're over 40 and haven't started saving for retirement, even these relatively large annual contributions may not be enough to reach your retirement goals. Here are five questions to help you decide whether your 401(k) plan will be sufficient to fund your retirement needs:

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What kind of lifestyle do you want in retirement? You'll find general rules of thumb indicating you need anywhere from 70 percent to more than 100 percent of your pre-retirement income during retirement. How much you will actually need depends upon your individual circumstances. For example, if your mortgage will be paid off and you plan to stay close to home mostly, 70 percent of your pre-retirement income may be sufficient. But if you plan to travel extensively, you may need 100 percent or more of your pre-retirement income. Also, the amount needed may change over the course of your retirement.

How much can you expect from Social Security? Social Security benefits were never designed to be the sole source of retirement income, but they still are a valuable source of income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes. For 2011, the maximum Social Security benefit for a worker retiring at 66 is $2,366 per month.

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How much does your employer contribute to your 401(k) plan? The $16,500 maximum contribution to your 401(k) plan does not include employer contributions. Employer-matched contributions vary by plan, but a typical match is 50 cents for every dollar contributed, up to a maximum of 6 percent of your pay. Over the past several years, many employers have reduced or eliminated matching contributions. As the economy has emerged from recession, many of these companies have restored the company match to pre-recession levels. If your employer offers a match, make sure you take full advantage of it even if your company's plan is not great. A generous match can contribute substantially to your retirement savings. In addition to a direct match on your 401(k) contributions, your employer may make contributions to a profit sharing plan on your behalf as well.

How much are you contributing to your 401(k) plan? While earning solid returns on your 401(k) investments is important, studies have shown that the amount contributed is the bigger determinant of your ultimate plan balance. Be sure to contribute as much as you can, and try to increase your contribution percentage each year.

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What other sources of income can you count on in retirement? If you already have other retirement assets, you might not need to count as heavily on your 401(k) plan. Other potential sources of retirement income might include a defined-benefit pension plan, individual retirement accounts (IRAs), an inheritance, or your spouse's retirement plan. If you have other investments, it is important to have a strategy that fully uses all of these retirement vehicles, both taxable and tax-deferred.

Providing for a comfortable retirement takes planning. Don't be lulled into thinking your 401(k) plan alone will be enough. If you haven't put together a financial plan, don't be afraid to enlist the aid of a professional if you need help.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.