According to Fidelity, one of the largest 401k providers in the world with over 12 million accounts, the average 401k balance is now around $91,800 as of 2016. Among employees participating in a 401k for at least 10 years, the average balance hit $251,600, up 12% from a year ago. Separately, Vanguard reported that the average 401k balance has now shot up to $101,650. For workers 55 years of age or older, the average balance is $143,300.
In seven not so short years, we’ve finally breached the peak average balance of $69,000 in 2007 and are now at record highs. It’s not so hard to believe since the Dow Jones and S&P 500 are also at record highs – although the stock market is looking dicy again in 2016. 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 $18,000 (2016 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.
Here’s is my recommended 401(k) savings chart by age or work experience:
WHEN THE 401K GETS BIG, IT STARTS WORKING FOR YOU
Once you have a sizable portfolio, your $17,500 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.
Here is the reality of how much people have in their 401ks today:
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. Here’s how often you should re-balance your 401k.
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.
RECOMMENDATIONS TO BUILD WEALTH
* Manage Your Finances In One Place: The best way to become financially independent and protect yourself 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 in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
* Invest Your Money Efficiently: Wealthfront, the leading digital wealth advisor, is an excellent choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. All you’ll be responsible for is methodically contributing to your investment account over time to build wealth.
In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $15,000 if you sign up via my link and only 0.25% for any money over $10,000. You don’t even have to fund your account to see the various ETF portfolios they’ll build for you based off your risk-tolerance. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.