How Long Will Your 401(k) Truly Last? Examining the Risks and Realities

Many Americans ask the question, “Will your 401(k) investment be enough to last you through your retirement?” To answer that question, you’ll first need to estimate the length of your retirement, know all your retirement savings resources, and determine a smart drawdown plan.

Here’s what you need to know.

Key Takeaways

• The top factors determining the longevity of a 401(k) are the amount saved and the amount withdrawn each month.
• Saving 10 times your salary by the time you turn 67 is a good savings guideline.
• Withdrawing 4% of your 401(k) retirement savings yearly will help your investments last.
• Keep a diverse set of investments in your 401(k), including bonds, which are safer investments than stocks.

Review Your 401(k) Balance

Begin by checking your 401(k) balance and adding in any other retirement savings, such as Social Security, IRAs, pensions, and other income sources. Inputting your current savings balance into online calculators will help you see where you stand with your retirement savings.

As for what that balance should be, Fidelity suggests having retirement savings of at least three times your salary by age 40, six times your salary by age 50, eight times your salary by age 60, and 10 times your salary by age 67. To achieve those high savings amounts, Fidelity recommends setting aside at least 15% of your pretax salary each year.

Having enough in your 401(k) for retirement is not just about the balance that you’ve worked so hard to build up. There are other factors to consider.

“Calculating how long a 401(k), or any investment account for that matter, will last in retirement is dependent on many factors—current balance, current monthly spending, current inflation rates and assumptions for future rates, current market conditions and assumptions for future returns, etc.,” says Easton Price, a certified financial planner at Apella Wealth.

Calculate 401(k) Withdrawals

An important factor in how long your 401(k) will last in retirement is how much you withdraw out of it each month. Spend a lot and you may go through your savings fast.

“How much money do you need on a monthly basis from your 401(k) to supplement your lifestyle?” Price says. “Then remember, you’ll likely need to increase that distribution amount to account for taxes, as all traditional 401(k) distributions are taxed as ordinary income.”

How much should you take out of a 401(k) for retirement spending? A 4% withdrawal of your balance each year is a good guideline.

“A generic rule of thumb is the 4% withdrawal rule. The theory states that you can reasonably withdraw 4% from your investment portfolio every year without running out of money,” Price says. “So, if you have a 401(k) balance of $250,000, you can distribute up to $10,000 per year and then recalculate 4% based on next year’s balance and so on. Keeping in mind, whatever you distribute will increase your taxable income and liability come April 15.”

Only withdraw what you need to meet your living expenses in retirement. Occasional larger withdrawals may occur as well.

“The reality is that most people don’t spend in a straight line,” says Justin Pritchard, a certified financial planner at Approach Financial. “It’s more likely that you’ll have occasional expenses throughout the years that come in chunks. You might buy new vehicles periodically, fix a roof, or have a medical issue, for example. Plus, you might start retirement by withdrawing at a high rate, but your withdrawals shrink once Social Security kicks in.”

Be aware of the markets and how your 401(k) investments are performing. If your investments are down, you may want to tighten your 401(k) withdrawals.

“You can also use a guardrails approach, where you adjust your income based on how your portfolio is doing. If things are going well, you get a raise. You might as well enjoy that money, and you can’t take it with you when you go. But when markets fall, you figure out a reduction, which you’ll hopefully reverse in future years,” Pritchard says.

Be Smart About Asset Allocation

To make your investments last, you’ll want to have a good balance of safer assets in your 401(k). Bonds are a good strategy when you are in or near retirement.

“It is important to keep five years of basic expenses kept in safer assets like bonds and cash to help (during) volatile periods in the market,” says Dean Tsantes, a certified financial planner at VLP Financial Advisors. “This avoids having to sell stocks while they may be down and avoids depleting the portfolio. The remainder stays diversified across various sectors to support potential long-term growth.”

The Bottom Line

How much you have saved and how much you withdraw each month are important factors as to how long your 401(k) investments will last in retirement. Saving eight times your salary by age 60 and 10 times your salary by age 67 are good saving guidelines. Withdrawing 4% of your 401(k) balance each year is a good guideline for spending.

You will also want to be smart about your asset allocation in your 401(k) during retirement. Investing in bonds is a good way to guard against stock market volatility, which could shrink the portion of your 401(k) that you have in stock funds.