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Is 401(k) Participation Sufficient For Saving & Investing?

22 October 2009 4 Comments

When it comes to saving and investing, 401(k) participation is as good as it gets for most 20-somethings.  401(k)s are great vehicles and should definitely be embraced, but the question remains: is participation in these plans all that you should worry about at this point in your life?

Looking At Some Numbers

Let’s assume that an individual is contributing 6% of their salary into their 401(k).  The following numbers would apply:

  • A salary of $40,000 would result in $2,400 annual contributions ($200 / month)
  • A salary of $50,000 would result in $3,000 annual contributions ($250 / month)
  • A salary of $60,000 would result in $3,600 annual contributions ($300 / month)

Many 401(k) plans offer company matching.  Let’s assume than matching is 50% so the 6% contribution results in an additional 3% matching.  The numbers then become:

  • A salary of $40,000: $2,400 plus $1,200 becomes $3,600 annually ($300 / month)
  • A salary of $50,000: $3,000 plus $1,500 becomes $4,500 annually ($375 / month)
  • A salary of $60,000: $3,600 plus $1,800 becomes $5,400 annually ($450 / month)

When you begin to factor in company matching, the numbers go up significantly.  Hopefully, you are able to have access to company matching in your 401(k) plan.

So, Is This Enough?

Sadly, I believe there are many cases where this isn’t enough.  The macro picture is even bleaker when you consider the fact that most 20-somethings don’t participate in 401(k) plans to this degree.  But, the problem is that even if you do put away this much money as shown above, it still might not be enough.  Enough for what?


If you are putting away $5,000 and up every year starting in your early 20s, you’re going to be in pretty good shape when compared to your peers.  The grim reality is that you still might not be able to afford a lifestyle you might expect in retirement.  Click here for why you might not have enough to retire.

With that said, consider yourself well ahead of the game if you’re socking away $5,000 and up every year already in your life.  Keep it up and when you can, supplement your 401(k).


You need to make sure you have some cash in a savings account as your emergency fund.  While some people may be comfortable with enough money to fund six months of expenses, maybe you are comfortable with $1,000 or $2,000.  The more the better obviously as you’ll be able to withstand some setbacks such as unemployment, health costs or other unexpected things that can occur.

Other Things

You need to save for other things than your retirement.  Examples are a down payment for a home (except I guess these days you can couple a home buyer’s credit with an FHA loan and you’re set), children, college tuition for your children, engagement ring if you want to get married, vacations, etc.

There are plenty of things to save for.  I recommend socking a small amount of money away each month into several savings “buckets”.  One is obviously your emergency fund.  One should be for large purchases such as vacations, furniture, etc.  A third should be for a down payment for a house (if you don’t own a house).  Lastly, a fourth should be a general long-term savings account that perhaps you put into various investments down the road in addition to your 401(k) investment mix.


The bottom line is I don’t recommend forgetting all other financial goals with regards to savings and investing if you are in a 401(k) plan.  Maximize your 401(k) plan but also pay attention to saving money for other areas of your life.  When in doubt, save more!


  • 20smoney (author) said:

    Hey, first of all, I don't have a 401k either. I work for a small company and we don't have them. That is pretty amazing that you have been putting 2-3k away each year into a Roth since 18! You should definitely thank your dad!

    I would definitely recommend maxing out your Roth every year. If you're married, max out your spouses as well. After that, beef up some savings and consider opening a brokerage account. You can add investments overtime into your brokerage account, just know that you will pay capital gains taxes (unlike the Roth).

    Personally, I do a Roth, a brokerage trading account and a savings account. Thanks for commenting.

  • Daniel said:

    I just graduated college and my company offers a Roth 401k, but with no match, although there are other bonuses I will be eligible for soon. Sure, I'm contributing 10% (about $5,000 a year) towards my retirement, but will that really be enough? 5,000 a year only brings me to about 1.25 millon (only..). While that sounds like a lot now, will it really be enough in 40+ years?

    I'm doing a good job of balancing short-term savings and retirement savings, but I don't really know how much I should be saving for 5 or 10 years down the road, when I imagine I'll be purchasing a home. Is it too early to be worrying about that now when I'm going to need money in a year or two? I'm having a difficult time justifying investing in ETFs when I don't have any concrete goals for 5-10 years.

    Great post, it really got me thinking.

  • 20smoney (author) said:

    Financial planning has lots of moving parts, and it can be difficult to have a concrete plan. The $5k a year is a great start. I think you're smart to view it as a start (as opposed to the entire solution). Like you said, will 1.25mil be enough? It's probably barely enough today, what will 1.25mil buy in 40 years? Inflation is an ugly thing.

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