The Average 401k Balance And Why It’s Too Low
According to Fidelity, one of the largest 401k providers in the world with over 12 million accounts, the average 401k balance is now around $77,300 as of 2/14/2013. For workers 55 years of age or older, the average balance is $143,300.
In five not so short years, we’ve finally breached the peak average balance of $69,000 in 2007. Hooray! At the depths of the crisis in 2008, the average 401k balance plummeted 25% to around $50,000.
401k participation levels hover at a respectable 71% for those making $40,000-$60,000 a year. Participating levels are therefore clearly much higher for those making more, but the exact number is unclear. For those making $20,000 to $40,000 a year, the participation level drops to just 53%, which is understandable.
Let’s say the average age surveyed is between 30-35, you can now see how absolutely pathetic these balances are if you are actually depending on your 401K to retire. You need to have the mindset of always maxing out your 401(k) every single year while saving at least 20% of your income after full contribution. There really is no other guaranteed way to retire comfortably if you aren’t saving a good amount. The power is all in your hands!
SAVING IN YOUR 401(k) IS A MUST
It may seem daunting to save $17,500 (2013 max) pre-tax dollars a year if you’re not making more than $60,000 a year, but trust me when I tell you it’s a must. If you spread out your contributions evenly over 12 months, you will be contributing $1,458 each month pre-tax. Hence, what’s really coming out of your paycheck is not $1,458 each month, it’s more like $500 every two weeks or $1,000 every month thanks to not having to pay taxes. You can do it. Millions of people survive on much less.
I recommend not stopping at the company’s 401(k) match, which often equals 3% of your base salary or $3,000, whichever is larger. I’ve heard many examples of a much higher contribution, all the way to a full 100% contribution match as well. Whatever the case may be, you need to do your best to max it out.
After 10 years, you’ll have at least $175,000 given it is very rare that one loses money in a balanced equities and bond portfolio in any 10 year stretch. Furthermore, I haven’t included any of the company matching or profit-sharing. Doesn’t at least $175,000 in your 401(k) sound good when you are 32 (assuming you graduated at 22), and $330,000 sound good at 42? The fact of the matter is, you’re more likely to have $200,000+ and $500,000+ if you keep maxing out your 401(k) based on average 4% returns, company matching, and profit sharing.
By 50 an 60 years old when you retire, you are well on your way to a million dollar 401(k) balance or more. However, the sad thing is that $1,000,000 in today’s dollars certainly buys much less than $1,000,000 dollars 10, 20, and 30 years in the future. Hence, your 401(k) cannot be depended on. It can only be considered a supplement during your retirement.
WHEN THE 401K GETS BIG, IT STARTS WORKING FOR YOU
Once you have a sizable portfolio, you’re $16,500 contribution will start making less of a difference. For example, a reasonable 4% return on a $500,000 portfolio is $20,000. If you made 20%, that’s a nice $100,000 return while you kicked back doing little. It’s all about building your nut as large as possible so that your money just starts doing all the work for you. Some of you gunslingers might laugh at a 4% return, but when you have millions of dollars in the bank or in your portfolio yielding a risk free 4%, it adds up!
You become more risk adverse as you get older. It’s partly because you might have more liabilities and dependents and don’t want to blow yourself up. But, it’s also because once you have a $500,000 portfolio, it will STILL make you sick to your stomach if you lose 10% of it, even though you are much wealthier than when you were first starting out Some say 10% is 10%, but trust me, when I saw my portfolios go down by $100,000+ during the downturn, it wasn’t a pleasant feeling.
HOW’S YOUR 401(k) PORTFOLIO DOING?
At some point in 2010, I noticed that finally, I had breached my 2007 highs. I haven’t bothered to calculate my portfolio’s real rate of return given that it is quite messy with the company match and profit sharing plan. All I really care about is how much is in the darn portfolio, and I’m pleased to say it is about 25% above its previous peak. You can see my latest 401K rebalancing here.
There’s no magic involved in the portfolio at all. The most important thing is an asset allocation between equities, bonds, and cash which you are comfortable with, and that you keep on maxing it out! I like the idea of keeping roughly your age as a percentage in bonds, and the rest in equities. Charles Farrell, from Your Money Ratios goes so far as to keep the allocation balanced 50/50 for your entire life. Whatever the case may be, do what you feel is right for you and you’ll have a multiple six-figure 401(k) before you know it! Couple your 401(k) with your hefty savings account, you will be good to go when it comes time to no longer work.
Recommended Actions For Increasing Your Wealth
1) Manage Your Finances In One Place: I encourage everybody to get a handle on their finances by signing up with Personal Capital. They are a free platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and whether I’m spending within my budget given they track all income and expenses. The best feature is their “401k Fee Analyzer” tool which is now saving me more than $1,000 a year in portfolio fees I had no idea I had! There is no better free tool out there that has helped me build my wealth. It only takes a minute to sign up.
2) Refinance Your Mortgage: If you are a homeowner and you have not refinanced in the past year, I strongly suggest you check online to see what the latest rates are. There is seriously some serious mortgage interest savings to be had! I always check with Quicken Loans because they are fast, quick, and provide a no obligation real quote based on the input you provide. I recently refinanced to a 5/1 ARM for 2.625% in the Summer of 2012 after just refinancing in the fall of 2011 for 3.125% from 3.625%! Build wealth by saving money on your largest asset.
3) Check Your Credit Score: Everybody needs to check their credit score once every six months given the risk of identity theft and knowing that credit score companies have your credit score right. For over a year, I thought I had a 790ish credit score and was fine, until my mortgage refinance bank on day 80 of my refinance told me they could not go through due to a $8 late payment by my tenants from two years ago! Thanks to the late payment, my credit score was hit by 110 points to 680 and I could not get the lowest rate! I had to spend an extra 10 days fixing my score by contacting the utility company to write a “Clear Credit Letter” to get the bank to follow through. Check your credit score for free here at GoFreeCredit.com and protect yourself.
Photo: Beef Wellington, Medium Rare on the New Amsterdam, Sam.