So we know 401ks are awesome. We've talked about the basics, we've talked about some of the unique provisions, we've even shared why you and I love them, why they can be so powerful. So let's see how folks out there are doing. We want to say, "Okay, we know that these things exist, we know that they're available, how are people taking advantage of them? How are our peers taking advantage of them?" So we want to give you some numbers. Not because we want to compare, because comparison is a thief of joy, but more just to help you understand: "Okay, where am I? Am I doing what I need to be doing, or am I following the herd moving in the wrong direction?"
So, we want to talk about folks in their 20s. If you look at all 401k balances for folks in their 20s right now, the average 401k balance for someone who is in that decade of the 20s is $21,529. Yeah, and if that the contribution rate is 11.3 percent, that's actually with the employee and the employer. That's a little less. I will tell you all these numbers that we're about to go over, I think they're less than what they should be, but I don't want to pick on people too much because I know in my 20s, I was broke as a joke. But you do need to prioritize as much as you can in your 20s. Go to moneyguy.com/resources
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Remember, our goal for you, we're going to talk about this in a moment, our goal for you is we want you saving 25% of your gross income. So folks in your 20s, if your contribution rate in your 401k is only 11.3 percent, that includes the employer match, boy I hope you're doing a lot of saving outside of that, and I just don't think that's the case. And if you're looking for a number to kind of hang your hat on, to think about, "Okay, how can I check my progress?" The goal, and this is based on research from Fidelity, is that by the time you get to 30, so by the time you get to the end of your 20s decade, inside of your accounts, inside of your retirement accounts, you ought to have 1.2 times your annual income saved. So whatever you're earning at age 30, you should have saved 1.2.
So, we said, Brian, the average contribution rate for someone in their 20s, including the employer match, is 11.3%, but we say, "Hey, we want you to save 25%." Yeah, let's talk about why we want you to do 25. Give them the carrot. Give them the carrot.
And this is why it gets so exciting. If you can figure this out and you can start saving 25% when you are 20 years old, and we're going to assume a very conservative 6% rate of return, we're going to assume very conservative wage growth of 1.5%, we're going to assume a very conservative 4% withdrawal rate. So if you can start at 20 and save 25% of your gross income, by the time that you get to age 49, your portfolio will have grown to a point to where you'd be able to replace 80% of your pre-retirement income. That is early retirement. Dare I say that's FIRE.
That's fire without figuring anything crazy out, other than starting really, really early at 20. If you start saving at 25 and you save 25%, you're still able to replace 80% of your income by 54. If you wait until age 29, you're still retiring early. If you can start saving at 25, you can replace 80% of your pre-retirement income by age 58. Here's what I think is important: be wary and careful of the YOLO crowd, because I know in your 20s you think you're just trying to maximize the fun factor. Just take a little bit of today for that great big beautiful tomorrow, because every dollar that you do save in your 20s is huge for your future. I'm telling you, if you want to get your 50- or 60-year-old self just sloppy-crying happy and want to give you a bear hug, start saving and investing in your 20s. I promise you, you're going to live to a ripe old age and you're going to be happy that you made that little bit of sacrifice when the money was so valuable.
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