Fidelity Investments, one of the largest administrators of 401(k)s in the world reported that the average 401(k) retirement balance for US workers hit a record high of $80,900 in the first quarter of 2013 thanks to a massive 140%+ increase in the stock market since March of 2009.
Those who are age 55 and older have seen their balances almost double to $255,000 from $130,700. Fidelity also says the analysis covers only people who have been with their current employer for 10 years or more.
I’d like to point out so many things that are alarming about this report.
THE AVERAGE 401(k) BALANCE DISAPPOINTS AGAIN
* Spend like there is no tomorrow. If the average balance is only $80,900 and the average age for Americans is around 35, then what have people been doing for the past 13 years out of college? Frittering all their money away on cars, clothes, vacations, and big screen LED TVs? Saving only $6,233 a year, but probably much less due to market appreciation, is absolutely ridiculous! Here’s a plausible explanation for why 401(k) balances might be so low.
* Retirees are screwed. It is great to see a doubling of balances to $255,000 for those 55 years and older, but if your life expectancy is around 80 and you plan to retire at 60, it’s hard to imagine a comfortable retirement. $255,000 over 20 years is only $15,500 a year until you’ve got zero. Add on maybe $12,000 a year for Social Security and you’ve got $27,500 a year to live on. Hopefully you have no mortgage and a great health care plan! The ideal withdrawal rate in retirement does not touch principal. But if you want to selfishly spend all your money on yourself, then go for it.
* Wrong comparison. Everything looks good if you compare the value against the year 2009. Real estate, stocks, gold, you name it have all gone up. What’s more interesting is comparing current 401(k) balances to 2003-2005, a full 8-10 years ago. Due to contributions, I’m sure they are higher. But how much higher? That is the real question.
* Four years is a long time. If you max out your 401(k) for four years, right there you should have around $60,000. So to say the average 401(k) is now $80,900 is very underwhelming. People are just not saving enough. Here is my recommended amount in 401(k) by age for folks to follow.
* Pensions rule. 401(k)s were supposed to supplant pensions. I know plenty of people who work for the government and other organizations who receive $40,000-$100,000 a year pensions for the rest of their life. Those pensions at 60 are worth $800,000 – $2 million dollars if you live until 80! If all people over 55 have is $255,000, then the 401(k) is doing a poor job. We cannot trust people to save.
TIME TO START SAVING UNTIL IT HURTS
If you are still in your 20s or 30s, please do your best to max out your 401(k). Save as much as you possible can until you can’t take it any more and have to cut back on your lifestyle. I promise you that you won’t be less happy saving lots of money as you start getting used to your new budget. In fact, you will probably gradually increase your happiness as you require less and less while saving more and more.
If you’re in your 40s or over, there’s no time like the present. Retirement years are meant for good times, not living in fear of running out of money. I guess we can expect the government to bail us out, but it’s best not to expect anything from anyone. If you currently have a 401(k), I highly recommend running your portfolio through Personal Capital’s free 401(k) Fee Analyzer. It found $1,700 in annual portfolio fees I had no idea I was paying. As a result, I got rid of the high cost mutual funds and replaced them with lower costs. Over 20 years, I will save $44,000+ in fees.
Check out the average 401k balance by age! It’s updated for 2015 where the maximum contribution is $18,000 from $17,500 in 2014. Also find out if you’re saving enough for retirement with Personal Capital’s new retirement calculator.
Regards,
Sam
That sounded so much like you Sam (as I was reading it)! 🙂
Thanks to you and several others, I’ve been bumping my contributions up every 2-3 months, and it’s hurting but makes me happy that it’s being put away. If our furlough is stopped, that’ll be 10% that will be going into it (hitting over 20%)!
It’s amazing to me that I’m not only doing better with my 401k than people my age but also those that are almost ready to retire. With all the lack of saving, does anyone else think that this result in some sort of huge economic bubble or social distortion within the next few decades?
My 401(k) balance is about $65 right now. That’s because I’ve had exactly one paycheck since my company restarted their match and I’ve never worked for an employer before that even offered one. I’m not quite to 35 myself, but $80,900 is probably half of the total I’ve made so far in my life!
Besides, the question is how much money do you actually need? You pointed out that the average 55 year old’s balance, disbursed over 20 years (oh, God, I hope I’m not stuck in retirement for that long. I’m hoping for <5 and planning for 10) + social security is $27,500. That's more than enough for my budget. Our current budgeted expenses are ~1900/month. Once we buy a place and have it paid off by retirement, our expenses are roughly 10k per year.
What is more scarier than a low balance on a 401K is the fact, many Americans don’t even have one or other retirement savings!
One good thing that came out of this recession was that people actually saved up more. Hope the trend continues (the saving, not the recession of course! )
I cannot believe folks don’t have any savings. It’s just not rational to live like a daredevil one’s entire life.
FS, point of information, the 401(k) has only been established since 1978, and didn’t see widespread corporate implementation until the early ’90s. Wages have nominally quadrupled since then, so those early years for those lucky enough to have participated probably didn’t amount to amounts comparable to salaries and contributions for recent graduates.
In example, I was fortunate to have a 401(k) opportunity for 26 years and accumulated $566,000 by maxing it out. But my early years were negligible in nominal dollars, and my last 15 years were during a couple of brutal bear markets where the S&P 500 had a compound return of 2% annually. I realize for you, with 13 years in at a high-salaried position with a decent match, this wouldn’t impress you. But I’m sharing it, to show that this is what a real person comes up with after 26 years. Not many can compare to what you have achieved in your worklife and financial results.
Savings for retirement really depends on extra income; a 26 year-old who makes $80,000/yr has a much easier time finding that extra for savings, than one who makes $40,000. Into the ’30s, acquisitions like homes and cars and paying off student debt might take priority, and then in the ’40s comes college expenses. Less than 30% of US adults have a 4-year degree, and those without that degree have fewer choices for jobs with great compensation. A huge majority of US adults (only 64% of which are in the workforce) make $50,000 or less.
With all that said, I can see the $80,900 figure being reasonable. Quite a few corporations have also made the 401(k) participation as a ‘default’, requiring an active decision to opt-out. That may help to bring up the balances in future years, too. Fidelity is working their own agenda with this data, and it is working.
$566,000 is still much greater than the median or average, and 20+ years is long enough to accumulate much more than the media or average as well.
$80,900 is not going to cut it. That amount generates $3,000 a year if you are lucky in dividend and interest.
“Fidelity also says the analysis covers only people who have been with their current employer for 10 years or more.”
This is the most alarming part to me! Whenever I see the numbers on average 401(k) balances, I assume that people who have only been working a couple years and people who have switched jobs and rolled over their old 401(k) into an IRA are responsible for pulling the average down, but they’re excluded from this number! That’s really quite sad.
That is interesting… and how many people do we know that work at their current employer for 10 years or more? Not many.
I don’t max out my 401k (close), but I do put a lot into it, and I also cap my Roth IRA every year. I also try to cap my HSA account too.
I fully believe that these are the average balances. For one reason or another many do not view it as important to put away for retirement as they fear how they’ll do in the now. What they’re missing is that saving for a retirement is a marathon and not a race and that marathon starts now…not five years from now.
At least it’s fun to spend money in the now! Instant gratification.
As I near retirement, I realize that I am more like my parents than I ever realized. The influence of parents is understated! They were always looking to the future and saved and invested well. My mother without my father (he died prematurely) was able live reasonably well all the way to 98 years old. I think most people do not realize that as little as $4-5 a day when you are 18 years old will guarantee a reasonable retirement.
I agree with you on parental influence. I’m frugal because I see my parents’ frugal habits. They stick with me like glue.
I don’t how people have so little money. I currently have $13,000 in my 401K, and I have only been working a year. I’m trying to figure out how I’m going to start maxing it out sooner rather then later.
Definitely go all out. You’ll be so happy you did once you hit your 30s and beyond.
A lot of people don’t even think about retirement and how much money they’re going to need when they are in their 20’s and 30’s. I know I didn’t for many years after I graduated and I wish I had been smarter than that. I agree with you on pushing yourself to save more than you think is comfortable because we do readjust. That’s why many years ago I switched my 401k contributions to a percentage of my salary not a fixed dollar amount. When I got a raise I didn’t have to think about logging in and changing my contribution.
So long as the percentage amount equals the maximization amount, all is good! You’ll wake up 10 years from now and be blown away with how much you’ve saved. Goodness willing the markets hold up as well.