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.

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 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 $101,650 at the end of 2013 according to a study by the Transamerica Center for Retirement Studies and Vanguard. 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 (401(k) + IRA)

Recommend 401k Savings 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.

Age Years Worked Low End High End
22 0 $0 $0
23 1 $3,000 $6,000
24 2 $6,000 $12,000
25 3 $10,000 $20,000
30 8 $35,000 $50,000
35 13 All good until here. $75,000 All good until here. $110,000
40 18 $100,000 $150,000
45 23 $130,000 $200,000
50 28 $225,000 $300,000
55 33 $270,000 $350,000
60 38 $345,000 $500,000
65 43 What happened? $400,000 What happened? $800,000

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.

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


Average 401(k) Balance By Age Group 2014
Age Real Average Balance Financial Samurai Suggested Balance Shortfall
50-54 $224,000 $468,000 – $1,075,000 50-75%
55-59 $250,000 $553,000 – $1,470,000 55-80%
60-64 $234,000 $638,000 – $1,974,000 60-85%
65-69 $228,000 $723,000 – $2,618,000 65-90%
70+ $230,000 Enough To Live Until 110 Bailout Alert
Source: AARP / FinancialSamurai.com 2014

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 2/14/2013 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.

Feedback

We’ve read four 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

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.

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.

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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.

  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.

    • thomas47 says

      I agree. I also like to keep my past several 401ks separate, even though Fidelity calls me to consolidate.

    • 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!

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