As we head into 2025, retirees and those nearing retirement are looking closely at their 401(k) savings to determine just how far their funds will stretch. With new IRS contribution limits and catch-up options, understanding how much one can contribute—and how long those contributions can last—is key for financial security in retirement.
The IRS has set the 401(k) contribution limit for 2025 at $23,500, an increase from previous years. For workers aged 50 and older, catch-up contributions remain at $7,500, meaning they can set aside a total of $31,000 in 2025, providing those nearing retirement with an extra opportunity to boost their savings. Additionally, individuals between the ages of 60 and 63 can make even larger catch-up contributions under the Secure Act 2.0 provisions, offering specific age-based support to maximize savings during the final years of their careers.
These increased limits allow dedicated savers to boost their 401(k) balances significantly over time. But how far will this type of savings go when it comes to covering retirement expenses? To answer that, it’s essential to consider various factors, such as the state of residence, inflation, and annual expenses.
Key 401(k) changes for 2025
Unlike in 2024, 2025 brings significant updates to 401(k) plans, particularly for higher earners and Roth account holders. Beginning in 2026, individuals 50 and beyond and earning over $145,000 will be required to make their catch-up contributions to a Roth 401(k) instead of a traditional 401(k), impacting tax planning as Roth contributions are taxed upfront.
Additionally, starting in 2024, Roth 401(k) accounts no longer require mandatory minimum distributions (RMDs), aligning them more closely with Roth IRAs and making them an attractive option for retirees focused on tax-efficient withdrawals. These changes, along with the higher contribution limits, make 2025 a promising year for expanding and managing retirement savings strategically.
Estimating 401(k) longevity based on state costs
According to recent data from GOBankingRates, a maxed-out 401(k) balance, estimated at $5.7 million after three decades of steady contributions, may last between 26 and 64 years, depending on the state’s cost of living. In high-cost states like California or New York, a retiree could use up their savings in just over 26 years. In states with a lower cost of living, such as Mississippi or Arkansas, this amount could last over 50 years, possibly making the retirement fund sustainable for the rest of a retiree’s life.
Median 401k balances by age:
20’s: $6,700
30’s: $22,100
40’s: $41,600
50’s: $64,300Americans also reported that $1.46 million is what they need to have a good retirement.
The math isn’t mathing.
— theficouple (@theficouple) July 8, 2024
Where you live in retirement has a major impact on how long savings will last. For example, California and New York have much higher average housing, healthcare, and general living expenses than lower-cost states. A retiree with $5.7 million in California might see their funds run out after about 18 years, while in a state like Mississippi, the same amount could cover expenses for more than 54 years.
In planning for a sustainable retirement, choosing a state that aligns with one’s budget can make a substantial difference. Those aiming to stretch their 401(k) savings may consider relocation or adjusting their spending habits.
Retirement planning and spending strategies
Maximizing the longevity of a 401(k) requires more than simply choosing a low-cost state. Retirees must also consider inflation, investment returns, and lifestyle to ensure their savings last. Inflation gradually reduces purchasing power, meaning that over time, the same amount of money buys less. With an average inflation rate of 3%, a retiree’s costs could rise significantly over the years, so planning for rising annual expenses is essential to maintaining a steady lifestyle.
It’s also important for retirees to consider how living expenses change over time. While healthcare costs typically increase with age, some other expenses, such as mortgage payments, might decrease or even disappear. Being mindful of these patterns allows retirees to allocate their funds more effectively, ensuring they’re prepared for the higher costs of health-related expenses down the line while cutting back where possible on other expenses.
Investment returns play a critical role in the sustainability of a 401(k), although they can be unpredictable. A well-balanced retirement plan typically includes a mix of low-risk assets, like bonds, for stability, and moderate-risk assets, like dividend-paying stocks, for growth potential. This balanced approach can help keep the account growing steadily, allowing retirees to draw income without depleting their principal too quickly.
Consider other sources of income
A 401(k) often serves as the backbone of retirement savings, yet for some retirees, it may not be sufficient on its own. Supplementing this primary source with additional income streams can add stability and help preserve the retirement fund balance for a longer period. Social Security benefits, part-time work, and rental income are popular ways to enhance financial security and reduce reliance on 401(k) funds.
Delaying Social Security benefits until age 70 can significantly increase monthly payouts, often covering a larger share of a retiree’s expenses. This added income can reduce the need to draw as much from a 401(k), helping to extend its life. For those who enjoy staying active, part-time work offers a chance to earn extra income, providing financial support while allowing retirees to engage in meaningful activities without quickly depleting their savings.
Investing in real estate or owning rental property is another way to generate passive income. Rental income can help cover various living expenses, offering a steady cash flow that complements retirement account withdrawals. This income diversification not only boosts financial security but also gives retirees more flexibility to manage their spending over time.
Retirement longevity plan
Longevity planning—ensuring your savings last throughout retirement—means balancing withdrawals with your expected lifespan and financial needs. Financial advisors generally suggest following the 4% rule, where retirees withdraw no more than 4% of their savings each year to prevent early depletion. However, with today’s economic shifts, some financial experts now suggest a more conservative 3% rule, especially for those in high-cost states.
Moving to a state with lower living expenses can also extend retirement funds significantly. States like Mississippi, Arkansas, and Oklahoma have a lower cost of living, allowing retirees to maximize their savings and cover more years without sacrificing quality of life. Retirees considering a move should weigh factors like state taxes, healthcare options, and proximity to family.
Maxing out 401(k) savings
Most people do not contribute the maximum to their 401(k), though fully funding it can provide a foundation for a comfortable retirement. Since 401(k) savings alone may not cover all expenses, retirees who diversify income sources and manage spending typically achieve greater financial security. Staying aware of state expenses, contribution limits, and inflation is crucial for making sound, long-term financial decisions.
According to Vanguard’s 2024 How America Saves report, only 14% of participants reached their contribution limit in 2023, with most of these being higher-income, older, and having longer job tenures. As Social Security alone may not be sufficient, private-sector workers without pensions will increasingly rely on their accumulated savings in workplace plans and other personal accounts to fund their retirement.
Final thoughts on 401(k) longevity
Retirement planning is about more than just contributing as much as possible to a 401(k). It involves understanding cost-of-living differences, investment returns, and income options. Retirees can benefit from a flexible approach, revisiting their plans regularly and adjusting based on factors like market trends and lifestyle needs.
Many financial advisors specialize in retirement planning and can help retirees create a strategy that considers factors like inflation, healthcare costs, investment returns, and the ideal withdrawal rate for their situation. With a strategic approach and careful financial management, retirees can ensure their savings provide for a secure and comfortable retirement.
