Investment management firm Vanguard reported the average account balances for 401(k) plan participants reached a record high of $101,650 at year-end 2013. Bust out the champagne! Who said there’s a retirement crisis on our hands?
Based on the Investment Company Institute (ICI), 51 million American workers were active 401(k) participants. 51 million is roughly half the US workforce out of a total population of 313 million. Hence, if the average 401(k) balance for half the US workforce is $101,650 then I dare say things aren’t as bad as they seem.
With MyRA or IRA making up for the other half of the working population with $5,500 a year contributions and Social Security, personal savings, personal investments, and pensions taking care of the other 200 million Americans, we’ve got America covered. (See: How Much Should I Have In An IRA By Age)
OK, maybe it’s not so easy. We’ve got a lot more work to do to ensure a great retirement life, so let’s revisit my recommended 401(k) savings amounts by age or work experience to make sure. I also provide a savings guide by income chart as well.
RECOMMENDED 401(k) AMOUNTS BY AGE OR WORK EXPERIENCE
The proper rows to compare the average 401(k) balance of $101,650 are ages 30 and 35 due to the average age of Americans.
My numbers are $29,000 – $250,000 higher than Vanguard’s reported average because we are not average. We are personal finance enthusiasts who spend time reading and writing about money, retirement, and financial freedom. The average person is saving less than 10% of their income and buying cars worth 50%+ of their annual gross income (median price car is now $31,000 vs. the median household income of $51,000). In other words, the average American will be depending on us to support them. Awesome!
Assumptions: My figures are aggressive because of the assumptions a person finds full-time median income employment by 23, and maxes out his or her 401(k) by 26. I also assume people care about their financial future, which is not apparent based on existing graduation rates and savings metrics. For the low end of the chart I conservatively provide no growth. For the high end of the chart, I estimate a 5% constant rate of return throughout their entire working lives. Both assumptions are conservative given the historical ~8% annual return of the S&P 500.
Flexibility of Chart: The recommended 401(k) amounts above can also be used as a guide for all your pre-tax retirement accounts such as your IRA, ROTH, ROTH 401(k), SEP IRA + investments by age if you wish. You can also use the chart as your combined savings for you and your spouse, although I always highly recommend each spouse build their own financial safety net because things happen. But based on my recommended net worth allocation, there has to be more to these numbers – namely property, private investments, your business and a potential X Factor.
THE IDEAL OVERALL SAVINGS SCENARIO
In a financially robust world, I’d like everyone who has access to a 401(k) to max out their 401(k) and then continue to save and invest all they can in an after-tax investment account. Maxing out your 401(k) probably requires around a $50,000 income to feel comfortable, although there are many examples of folks who are able to put away $17,500 on much less.
To “feel comfortable” though, is really a luxury. If you feel comfortable in your savings journey, then you are not saving enough. The goal is to really try and increase your income while maintaining your savings habits. Have a look below.
As you can see from the chart, maxing out your 401(k) and accumulating post-tax savings gets easier the more you make. The system I encourage everyone to undertake is to max out their 401(k) first and then multiply the savings % in the chart to your after tax income to save more. So long as you are maxing out your 401(k), a realistic worst case scenario is that you end up with the amounts in the “Low End” of the first chart in this post.
The ideal income level hovers between $150,000 – $200,000 because you’re able to max out your 401(k) and still save $35,500 – $53,000 after tax if you stay disciplined at a 35% savings percentage. Your marginal Federal tax rate isn’t egregious at 28% either so you don’t feel like you’re getting pounded by the government. (See: Expense Coverage Ratio Targets)
NOBODY SAID SAVINGS WOULD BE EASY
The $101,650 average 401(k) figure for the end of 2013 is a psychologically important number. With over $100,000 in savings, a 10-20% move in performance really starts making a difference compared to the maximum 401(k) contribution of $17,500. It’s all about building the financial nut so that your returns start overtaking your contributions.
Once you get to significant milestones such as the $100,000 mark, you’ll get even more motivated to save more. Corrections in the stock market will feel more painful. But over time, you should figure out a proper asset allocation of stocks and bonds that matches your risk tolerance.
Make savings a priority by continuously thinking about the financial freedom you will achieve. The sacrifice is worth it because you’ll realize after a while that savings is no sacrifice at all.
Recommendation: Run your portfolio through Personal Capital’s free “401k Fee Analyzer” tool. The tool will show you exactly how much you are paying in fees a year, your total fees you’ll pay until your desired retirement age, and how many years your fees are lopping off the years until retirement. I ran my 401k through the tool and it showed I was paying $1,700 a year in fees I had no idea I was paying. As a result, I reallocated my funds into lower cost index funds of similar investments to save about $1,300 a year, and more importantly, about 2 years less time I’d have to wait to achieve my projected 401k goal.