Explaining Why The Median 401(k) Retirement Balance By Age Is Dangerously Low

Retirement Life On Lake TahoeYou likely won’t be able to live off your 401(k) alone in retirement, but you should be able to combine your 401(k) with alternative savings, investments, and Social Security to live a financially free life when the time comes to withdraw at the age of 59.5. Most Americans don’t have pensions.

The below chart shows what a typical 22 year old college graduate should have accumulated in their 401(k) if they followed my advice and started maxing out their 401(k) after two years of working. The maximum amount one can contribute for 2015 is now $18,000 from $17,500 pre-tax in 2014.

The high end shows what happens if there is roughly a 5% constant rate of return from investing. I’m not even including contributions or company match to keep things conservative.

The reality is that the median account balance in the U.S. is only around $91,800 as of 6/25/2015, according to Fidelity, one of the largest 401k managers around with over 12 million accounts. Among employees participating in a 401k for at least 10 years, the average balance hit $251,600, up 12% from a year ago. Have you checked your 401k for excessive portfolio fees yet? If not, check out Personal Capital’s free financial management tools and save money.

At least the median has risen by over 100% from around $47,000 during the depths of the bear market in 2009. Furthermore, the current median account balance is now higher than pre-crash 2007 levels of $74,781 thanks to contributions.

Given the median age of Americans is 35.3 according to the US Census Bureau, the median 401(k) balance per person should be closer to $218,000-$350,000 according to my 401(k) retirement savings guide instead of $101,650. So what happened to the missing $117,000 to $239,000?

FINANCIAL SAMURAI PRE-TAX SAVINGS GUIDELINE 

401k Savings By Age Chart

HOW MUCH DO PEOPLE REALLY SAVE FOR RETIREMENT?

The base case assumption is the typical American after 13 years of working has roughly $100,000 in their 401(k) accounts at age 35. As a result, we can assume that the average person from ages 22-35 only saves around $5,800 a year. We can also assume incomes rise over time, and therefore absolute savings amounts also rise over time. Below is a reworked chart to better reflect what the average person has in their 401(k) + IRAs due to job changes. Unfortunately, something wrong happens between the ages of 35 to 65.

Why 401k Balance So Low?

Everything looks much more reasonable right? We’re only talking about $6,000-$9,500 in savings a year until age 65 for the low end to reach $400,000 by the age of 65 after 43 years of work. But guess what, even the new realistic low end assumptions are too high based on the following facts of median 401(k) balances for those in retirement age. People are just not contributing to their 401ks and using a free software like Personal Capital’s Retirement Fee Analyzer to reduce investment fees to maximize retirement returns!

Median 401(k) Balances For Retirees (65) At Different Income Brackets

• For people who earn between $20-$40,000 a year the median 401k account at retirement is ~$70,000 (83% short)

• For people who earn between $40-$60,000 a year the median 401k account at retirement is ~$105,000 (74% short)

• For people who earn between $60-$80,000 a year the median 401k account at retirement is ~$170,000 (58% short)

• For people who earn between $80-$100,000 a year the median 401k account at retirement is ~$255,000 (36% short)

• For people who earn over $100,000 a year the median 401k account at retirement is ~$370,000 (still 10% short)

As you can see, only folks who earn over $100,000 come close to my more realistic chart above at $345,000-$500,000 at age 60. The problem is, the median income in America is only around $50,000-$60,000 a year resulting in a median 401(k) account of only around $105,000 at retirement! With $105,000, you might be able to get three years living in San Francisco if you’re lucky!

Something happens between ages 35-60 where one accumulates only $30,000 more until retirement. Clearly statistics are playing tricks on us again because it’s hard to fathom someone would only saving $1,300 a year during their highest paying years.

EXAMPLE FROM THE AMERICAN ASSOCIATION OF RETIRED PERSONS USING AVERAGES INSTEAD OF MEDIAN

401k-shortfall-real-vs-fs-aarp

If you retire at the age of 65 with only $228,000 with nothing else except for a $1,500/month Social Security check, how long do you think you can survive comfortably in retirement? Let’s also assume that your house is also fully paid off. In San Francisco, Honolulu, and New York City, I *might* be able to happily live for six ($35,000 a year gross) assuming I don’t have major medical expenses. Let’s double the time to twelve years if you live anywhere else in the world. We better die at 77 or else life is going to get even tougher!

Note: Fidelity came out on 2/14/2014 highlighting the average of their 12 million 401(k) plan participants is up 12% to $77,300. For workers 55 years of age or older, the average balance is $143,300. These are terrible numbers.

401K BY AGE DISCREPANCIES EXPLAINED

I’ve been consulting with more clients about their personal finances and what I’ve discovered is that something always seems to come up and knock someone off their retirement savings path. It’s all fine and dandy to assume everyone should logically max out their 401(k) or at least save 20% of their after tax income until retirement, but this is seldom the case. With consent from my clients, let me share three case studies to illustrate some points. I’ll also highlight one reader’s e-mail feedback about the topic as well as my own example. Names are changed for privacy reasons.

Case Study One – Family To Support

Joe is 42 years old and makes $120,000 a year as an engineer. He’s been working for 19 years and has $80,000 in his 401(k) (vs $300,000+ recommended). When I asked him to share his 401(k) situation he shrugged. He never considered maxing out his 401(k) because he always thought he wouldn’t have enough money left to take care for his wife and son. His wife worked for the first eight years and decided to stay at home after giving birth. Going from a two income family to a one income family is difficult if you’re not use to saving half.

Joe has about $12,000 in after-tax savings which will cover about four months of living expenses just in case something bad happens. Given the thin buffer, we talked about the importance of getting long term disability. When I dug deeper, I realized Joe has a penchant for fixing up old cars. All told, he’s spent over $60,000 after taxes to beautify his two 1965 Mustangs.

Case Study Two – Expensive Living

Sally is 32 years old, and makes $75,000 + bonus as a medical equipment sales rep. Sally got her Master’s degree in healthcare, and graduated with $27,000 in debt at the age of 24. She pays about $500 a month in student loans which she plans to pay off in 10 years tops.

After seven and a half years of working at a reputable firm, Sally has $70,000 in her 401(k) compared to a recommended $127,000 after eight years of work experience according to my guide. Sally only contributed 10% of her annual gross salary into her 401(k) because of her school debt, car payments, credit card payments, and $2,600 a month rent here in San Francisco. Sally’s case shows that education is expensive and good paying jobs come with higher cost of living. Sally has about $5,000 in savings in the bank.

Case Study Three – High Income Burnout

Susie is 34 years old, single and makes $150,000 + bonus as a VP at an investment bank based in San Francisco. She’s been working for 12 consecutive years out of college. In between years 10 and 12, Susie took a 1.5 year hiatus to become a baker during the financial crisis. She was burned out and wanted to try something new. But, after spending $25,000 for tuition, missing out on 1.5 years worth of income, and getting screamed at while making only $10 an hour, she realized being a baker at a restaurant was not for her. “If I’m going to get yelled at making $10 an hour, I might as well make a lot of money!” Susie joked.

Susie has about $150,000 in her 401(k), 50% higher than the current median according to Transamerica. However, given she didn’t earn any money for 1.5 years and payed a lot for tuition, Susie is also about $50,000 light based on my guide. Susie was only contributing about 10% of her pre-tax income to her 401(k) for her entire career because she didn’t want to tie her money up beyond the company match.

Case Study Four – Highly Educated Couple

An e-mail from a reader responding to the Average Net Worth For The Above Average Person article:

“I noticed that most of your posts are geared towards people who start working at age 22 with minimal debt – as just one example, your “above average” people projections.

But many “above average” people do not start working at age 22 and incur substantial debt before they start working. For example, I am a lawyer that obtained a master’s degree and then a law degree before starting my career at age 28. My wife is a doctor, who completed her residency and started practicing at age 28 as well. Both of us started our careers with substantial student loan burdens – over $325,000 between the both of us.

Our late start means we lose a lot of the magic of compounding interest. And our debt burden takes a big chunk of our monthly income. These are significant challenges.

Case Study Five – Early Retiree

My 401(k) has grown to roughly $415,000 as of today at the age of 35. Although $415,000 is roughly $80,000 above the high end of the range for someone who has contributed for 13 years, my 401(k) is at serious risk of falling behind given I no longer contribute or have a company match. My last year of work saw over $25,000 in company 401(k) match that I’m starting to miss. Cherish your 401(k) match and profit sharing while you still got it!

Based on a conservative portfolio analysis (4% per annum growth, no contributions or match), my 401K will grow from $400,000 to roughly $1,100,000 by the age of 65, the low end of my guide. Although I think 4% per annum growth is feasible, I still fear horrendous bear markets in the future. A company match and profit sharing buffered my portfolio extremely well during the downturns of 2001-2003 and 2008-2010. I now feel my portfolio is swimming naked, which is why I need to be extra disciplined in my rebalancing.

Case Study Six – Divorce!

A reader shares his story.

“What is misleading as to why many 401ks are half or less what they should be is one word…DIVORCE. I am currently 44 yrs old. 7 years ago at age 37 I had $125,000 in my 401k and then….BOOM! Stock market crashed and my 401 was worth $80,000. Yeah not fun. 7 years later it has now recovered but that’s lost years and now my 401k is worth $130,000 and I’m getting divorced and half goes to my wife. Now I’m back to $65,000. Ridiculous. Over 50% of married couples get divorced and many men are paying Child Support and Alimony and aside from losing half our retirment we now have nothing for years to invest…but I digress.”

Feedback

We’ve read six examples of people who do not meet the range in my 401(k) Retirement Savings Guideline chart despite earning healthy salaries. I also do not feel confident I’ll reach the high end of $2.6 million by the time I turn 65. You might therefore come to the conclusion that my 401(k) Retirement Savings Guideline is off and you would be correct given the average 401(k) balance for a 35 year old is roughly $100,000 and not $215,000 as I would like.

But, you would be incorrect to assume my guide is off based on what you really need when you no longer have a job. You just have to do the math yourself to see if you can live off even $250,000 as the AARP picture highlights for the next 20-30 years in retirement.

Here’s another chart on the realities of how much the average American has in their 401k:

Average 401k Amounts By Age 2014

* We can estimate a 20%-30% increase in all numbers above given the stock market return roughly 13% in 2013 and 2014.

DO YOU WANT TO BE JUST AVERAGE?

Life gets in the way of our retirement savings plans all the time. We have tuition to pay, expensive cars to fix, vacations to take, concerts to attend, shoes to buy, Range Rover Superchargers to drive, alimony to pay, sickness to deal with and economic dislocations to experience. Some of us just like to honestly blow lots of money and not give a damn! There’s always an excuse for not saving. However, if you don’t want to become one of those tragedy stories or a burden to your fellow citizens, then I suggest increasing your 401(k) contributions and after tax savings percentages.

If the amount you are savings doesn’t hurt, then you are not saving enough. At the end of our careers, we only have ourselves to blame if we come up short. Unless you have developed alternative income streams, paid off your house, and have other after tax savings, living off $350,000-$500,000 for the next 20-30 years is just $12,000 – $25,000. Pay yourself first before anything else and max out your 401K. After you’ve maxed out your 401(k), figure out where you can save some more.

Even if you do reach my retirement savings guide of $638,00 – $2,000,000 by the age of 60, you aren’t going to be living it up for the next 20-30 years if that’s all you got. You’ve seen the various 401k portfolio scenarios I’ve run based off just a $400,000 portfolio and you know inflation is a killer. Life happens. Just make sure you keep life happy.

Recommendation To Build Your Net Worth

Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 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 where my spending is going.

One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It only takes a minute to sign up.

Updated 6/25/2015. Maximum 401k contribution rises to $18,000 in 2015 from $17,500 in 2014. Make 2015 the year where you save more, make more, and grow your net worth to its highest ever!

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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Comments

  1. Nightvid Cole says

    Surely one should be allowed to count the present value of any vested pension plan benefit streams and whole life insurance, etc.? How about a growing family business?

    It’s quite common for middle-agers to have only $200,000 in retirement plans but also have $100,000 in present-discounted pensions, $100,000 in whole life or home equity, or perhaps a $250,000 family farm or business, or rental property.

    If you have a $250,000 business, farm, or property with no debt, a $100,000 whole life policy, and “only” $200,000 in your 401k, in your early 50s, you’re really not doing too bad. To say otherwise is, in a word, alarmist.

    • George Roberts says

      Cost of health c are is the killer. my husband and I are 63 and 62 respectively. We have six hundred and twenty thousand in assets. Our health insurance premiums and out of pocket will exceed $34,000 a year. That with neither one of us having anything particularly serious wrong with us. All along I had assumed 1500 a month would cover it nicely. Do the math. It doesn’t. I realize this is an old post that I am replying to. None the less we sacrifice and never made more than 90,000 a year combined and did not start saving until we were 39 years old. We put two children through college, tithe 10 percent minimum. with inflation I see no way we can live on anything less than 4000 dollars a month and that does not include health insurance or tithing. and of course our 401 K is pre tax so every dollar we take out we are looking at sending between 15 and 25 percent to the government and about 8 percent to the state. You need at least 1.2 million according to my math. We just did our best but it wasn’t enough. specifically I would like to have back the $55,000 we spent on weddings which both ended in divorce within 3 years. I have often wondered if the children might have worked a little harder at the marriage had they had an investment in it. A little off topic I realize but somehow I felt led to reply

  2. Michael Crundell says

    “The base case assumption is the typical American after 13 years of working has roughly $100,000 in their 401(k) accounts at age 35.”

    People are so out of touch with the economic realities of this country. People who went to school, did the right things, are working 60 hours just to pay bills, and not splurging.

  3. Glen E. says

    The author notes, “Something happens between ages 35-60 where one accumulates only $30,000 more until retirement. Clearly statistics are playing tricks on us again …” Here’s one place the statistics will play tricks:

    “Fidelity came out on 2/14/2013 highlighting the average of their 12 million 401(k) plan participants is up 12% to $77,300.”

    I am age 51, changed jobs a few years ago, and have a 401k with Fidelity with a balance of about $90,000. Pretty close to the Fidelity average, right? And my balance of $90k is way too low for someone age 50-55, right?

    I know it is recommended to consolidate all our retirement funds in one place, but many of us are lazy and leave the money in the old company’s plan when we change jobs. I have funds (IRA, SEP, 401k) from previous employers, spread over different mutual fund companies. My total retirement balance is about $450,000, but no one mutual fund company will see me with a balance of much over $100,000. In this case, the statistics of having my money spread in different places will be misleading compared to the true value of my total retirement funds.

    • Jeremy says

      “In this case, the statistics of having my money spread in different places will be misleading compared to the true value of my total retirement funds.”
      This also means fewer people are actually participating in these plans than 12 million individuals. In fact, proper to use the term as 12 million accounts.
      Statistics doesn’t mislead if the definitions are labeled correctly.

      If half of the people are in the same boat with spread out 401K accounts than that 12 million turns into others have them all over, than the numbers of 12 million accounts mean there are only 9 million with 401k accounts. Possibly less individuals are actually participating if people are really spread out like yourself. Just lots of accounts to a few owners.
      That’s speaks very poorly of the practicality of the 401K system. Especially considering pensions are virtually non-existent in private employment. And quickly becoming non-existent in public employment.

  4. Williams says

    Your examples by age assumes that the maximum amount one could contribute to a 401K plan over the last 20 odd years was $17,500. That’s not true. When I started working, the maximum was a little over $9,000. Just recently (about 2 years ago) has the number moved to $17,500. Therefore, the charts gives a good approximation for someone just starting out…they have at least a road map of where they should be (or aspire) financially regarding their 401k.

    Do you have charts with the historical caps on 401k amounts:

    2006 $15,000
    2005 $14,000
    2004 $13,000
    2003 $12,000
    2002 $11,000
    2001 $10,500
    2000 $10,500
    1999 $10,000
    1998 $10,000
    1997 $ 9,500
    1996 $ 9,500
    1995 $ 9,240
    1994 $ 9,240
    1993 $ 8,994
    1992 $ 8,728
    1991 $ 8,475
    1990 $ 7,979
    1989 $ 7,627
    1988 $ 7,313
    1987 $ 7,000

    I think I am do ok even according to your charts. However, it would be a little skewed for a person who is say 50 years old that capped out annually and is no where near your number because in the 80’s and early 90’s we couldn’t put in as much.

    Thanks. Great information….read your stuff all the time!

    • john says

      One other point: In many companies, one’s ability to contribute the “maximum allowable” is SEVERELY limited by some asinine Fed rule called “highly compensated employee”. We’re not talking CEO here…schmucks in the $100k range (maybe even less) are considered to be this. When this happens, poor you are limited to a MUCH lower figure that is calculated by the average % that the rest of the company workforce is contributing. Its a REAL “gotcha”! I was an engineer in an assy plant. I made a bit over $100k…but most of the workforce were young inner-city assy line people earning about $10-$15/hr. Guess how much THEY contributed to their 401Ks?v Not much. I was limited to about $5000 a year! Even after I maxed my Roth, I was still way below what I could have saved in a tax-advantaged account. So, I paid off my mortgage instead…and retired early, to their “shock”.

  5. Jerry says

    This site is good and bad… Not everyone is capable of making 70k or more… Like myself! Intellectual ability has a lot to do with the equation. My family has struggled to save every bit of the way and have done pretty good considering. I hope the end result will be gratifying.

    • says

      How do you not know you are incapable of making $70,000 Jerry? Have you tried starting a business, working another job, improving your education, finding something to leverage? There’s hope!

      • Javier says

        With all due respect – why would I want to pickup a second job and work 60+ hour weeks during the best years of my life? It’s not like retirement funds are 100% guaranteed to be there when we retire anyway. Like many folks here who lost tens of thousands of dollars in the blink of an eye, that could happen in the future.
        Rather than working two and three jobs in my 30’s, I’d rather do the things I enjoy doing while I am healthy and work on reducing my expenses. That way, when I retire, even if don’t have the money to buy one of the Florida Keys, at least I have 35 years of wonderful memories instead of having regrets of how my best, healthier years were spent working.

  6. Mark says

    Some of those 50 year olds that only have 150K in the 401 own 3 million dollars worth of cash flow generating real estate :) It’s a pretty bad idea to put more into your 401K than needed to a) maximize your employer match and or B) to shelter income from the IRS. Once you’ve done that, their is no benefit to the 401 and plenty of negatives. Diversify out of equities too! Real estate, precious metals, etc.. or if you love the stock market, at least open up a Roth instead of pigeon holing yourself into a 401 for *everything*.. The 401k is cool, but their is so much more to a real portfolio than one account that you can’t even touch until you are ‘officially’ able to retire per the government age requirement. What if you lose your job at 52 years old and you have nothing except your 401k? Time to eat cat food for a while? Diversify out of the 401 as soon as you hit the match.

  7. tom says

    I have a question, when your looking at what would be good 401k savings, is that based on one income or two incomes, so should my wife and I who are 47/51 have 1.2m each or 2.4m saved. I think that is somewhat crazy. We have about 1m between the two of us today and max our 401k and have very generous company matches. It makes me sick with all we save that were so far off from the mark. We also have another 100k in investments. If all this is true to be good we need 7m at 65 to retire, which I really don’t think will happen. So, what does this mean?

  8. Wallace says

    One thing you are not considering is the cost of children. Some have none, some have 1. For those that have 4 or more children you are not going to be able to provide everything they need while following your advice. So you have all of this retirement money in your old age, but no one to keep you company….no grand kids, young married off spring to brighten your old age days. The problem with your articles is they are unrealistic given the dynamics of life. Sure put all your money in retirement when it should be spent on camp fees, new clothes, education and family trips. You are only young once with a family and the time you spend together will last a lifetime and is more valuable then all your saved money. Between my pension, 401k and social security I will generate $60,000 a year and that does not include my part-time online business which will still be going. Hopefully 13 more years of 401k will get me up from 100,000 to perhaps 250-350k.

  9. Kevin says

    What is misleading as to why many 401ks are half or less what they should be is one word…DIVORCE. I am currently 44 yrs old. 7 years ago at age 37 I had $125,000 in my 401k and then….boom..stock market crash and my 401 was worth $80,000. Yea not fun. 7 years later it has now recovered but that’s lost years and now my 401k is worth $130,000 and I’m getting divorced and half goes to my wife. Now I’m bald to $65,000. Ridiculous. Over 50% of married couples get divorced and many men are paying Child Support and Alimony and aside from losing half our retirment we now have nothing for years to invest…but I digress.

    I have less in my 401k now than maybe others would have after the crash and recovery because after the crash I swore I would never invest in target date funds again..ever. I’ve got 70% of my retirment and future funds in a Target Retirment fund. I’ll never make more than 5-6% interest but I’ll never lose more than 2-3% during a crash either. Tired of watching my retirment grow and then every 6-8 years losing half due to Wall Street greed. Never again.

    • says

      Hi Kevin, thanks for sharing your situation. Good point about divorce. Was your wife not contributing to her 401k? If so, couldn’t you get half as well?

      I’m at a stage where I’m targeting 2-4X the risk-free rate of return, so 4%-8%. I’m all about conservative growth and capital preservation now.

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