The median 401(k) retirement balance is low. With such low median 401(k) retirement balances, it may be harder for a large swatch of Americans to retire comfortably. This post interviews various people with low 401(k) balances who explain why their 401(k) balances are so low.
You likely won’t be able to live off your 401(k) alone in retirement. However, you should be able to combine your 401(k) with alternative savings, other passive 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 reality is that the median account balance in the U.S. is only around $72,000 for 55-64 year olds in 2022 according to Vanguard, one of the largest 401k managers. The average 401k balance for 55-64 year olds is roughly $178,000.
But the average is screwed up to due the super wealthy. Even with $178,000 in your 401k at retirement age, you aren’t going to be living it up for the next 20 – 30 years without alternative sources of income.
According to data from Fidelity, here’s the average 401k breakdown by age in 2022:
- Ages 20 – 29: $9,900
- Ages 30 – 39: $38,400
- Ages 40 – 49: $91,000
- Ages 50 – 59: $152,700
- Ages 60 – 69: $167,700
- Ages 70 – 79: $160,200
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 $150,000 – $500,000 according to my 401(k) retirement savings guide instead of these pitifully low levels.
In this article, I’d like to share some stories on what happened to all the missing savings because we all know we should be maxing out our 401k every year for as long as we work.
Median 401(k) Retirement Balance Calculations
The below chart shows what a typical 22 year-old-college graduate should have accumulated in their 401(k) retirement balance if they followed my advice and started maxing out their 401(k) after two years of working.
The maximum pre-tax contribution amount is $22,500 in 2023 and will likely increase by $500 a year every couple of years to keep up with inflation.
I’ve divided the chart into three columns to account for older savers, middle age savers, and younger saves due to the different maximum contribution limits. I’ve also accounted for different return and company matching metrics.
The bottom line: everybody who consistently contributes to their 401k over a 38 year career will likely have at least $1,000,000 in their account. The 401k savings targets by age can also act as a total savings guideline as well if you wish. The median 401(k) retirement balance by age can improve if everybody starts saving more.
Median 401(k) Retirement Balance 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 several case studies on retirement balances 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 On Why Their 401k Is Low – 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 On Why Her 401k Is So Low – 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’s 401(k) retirement balance is $70,000 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 On Why Her 401k Is Low – 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 paid 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 Why His 401k Is So Low – 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 Why His 401k Is So Low – Early Retiree
My 401(k) was about $400,000 when I left work at age 34 in 2012. It grew to about $550,000 in 2020, and now to about $900,000 in 2023.
What I miss about work was my $20,000 – $25,000 a year in profit sharing. That addition was a huge boost to my annual 401(k) that cannot be underestimated.
It was only until 2014 when I realized I could open up a Solo 401(k) with the freelance income I was generating. My Solo 401(k) now has about $240,000.
Although missing out on 401(k) matching is a bummer, I have enjoyed my time as a fake retiree since 2012. Since I left work I’ve grown Financial Samurai and my online income. As a result, I’ve been able to grow my SEP IRA, which is worth about $370,000.
I’ve also written a bestselling severance negotiation book called How To Engineer Your Layoff. I also wrote a WSJ bestselling book called, Buy This, Not That. The income earned from these two creative projects can add to my Solo 401(k).
Case Study Six Why His 401k Is So Low- A Nasty Divorce
A reader shares his story,
What is misleading as to why many 401k’s are half or less what they should be is one word…DIVORCE. I am currently 44 yrs old. When I was 37 in 2008, I had $125,000 in my 401k and then….BOOM! Stock market crashed and my 401k was worth $80,000. Yeah not fun. 7 years later my portfolio recovered to $130,000. But then I had to go through a divorce.
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 retirement we now have nothing for years to invest…but I digress.”
Case Study Seven Why His 401k Is So Low- A Bear Market
After 10+ years of a bull market, the bear market finally came back in 1Q2020. The S&P 500 at one point lost 32% in a matter of weeks. It has since clawed its way back in expectation of a second half recovery. However, the downturn clearly hit a lot of 401(k) portfolios hard.
Then, in early 2022, a correction happened again with the S&P 500 and NASDAQ both declining by 10%. The stock market has had a great run since the pandemic began. However, volatility is back and lower return assumptions are here for stocks and bonds for the next 10 years.
Instead of just investing in stocks, consider bonds and real estate. Real estate tends to significantly outperform during downturns if real estate is not the cause of a downturn.
Take a look at the historical investment returns of Fundrise. Fundrise is my favorite real estate crowdfunding platform, especially during tough stock market years. Fundrise offers vertically integrated private real estate funds to take advantage of the inflation wave. It’s free to sign up and explore.
Case Study Eight – Black Swan Events Like A Global Pandemic
Who would have forecasted a global pandemic that caused months of lockdowns in America and around the world? The S&P 500 sold off by 32% from peak to trough in March 2020, and many people panicked and sold some stock. It’s understandable since the previous recession saw a 55% drop in the S&P 500.
In addition, who would have thought the S&P 500 would rebound so quickly and surge far beyond its pre-pandemic highs so quickly? You just never know, which is why it’s good to stay invested for the long run.
Today, there are more 401(k) millionaires than ever before because the stock market rebounded. But capital preservation is important, as we realized again in the 2022 bear market.
Bear markets and black swan events have a nasty way of crushing our 401(k)s. Therefore, please always pay attention to your risk exposure and asset allocation.
Life Happens To Us All, Which Can Bring Down 401(k) Balances
We all know we should be maxing out your 401(k)s but don’t because something always seems to get in the way. Who would have thought a global pandemic would shut down the economy for years? Crazy!
Not only should everybody contribute the maximum they can to their tax-advantaged accounts, people need to focus on building their taxable accounts as well. If you want to retire early, it is your taxable accounts and real estate investments which will provide the passive income necessary to be free.
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. No wonder why the median 401(k) retirement balance isn’t very high.
Here’s another chart comparing the median and average 401(k) balance by age and my 401(k) guidance if we continuously max out your 401(k) each year.
Recommend 401k Balance By Age
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 a year.
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 in your after-tax investment accounts. The goal is to generate passive income. You can no longer count on a pension or Social Security to support you in retirement.
The only thing you can count on for living a comfortable retirement is you!
Build More Wealth With Real Estate
Real estate is my favorite way to build wealth. Even with a low 401k retirement balance, you can do just fine if you have a solid real estate portfolio.
Real estate is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. Now, these properties are funding my retirement.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Best Private Real Estate Investment Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Recommendation To Manage Your Finances Easier
The best way to build wealth is to get a handle on your finances by signing up with Empower Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard. This way, you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts. Now, I can just log into Personal Capital to see how my stock accounts are doing. I can see how my net worth is progressing and where my spending is going.
One of their best tools is the 401K/Portfolio Fee Analyzer. It has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. It’s the best tool to help you beat the median 401(k) balance by age. You just click on the Investment Tab. It then runs your portfolio through their fee analyzer with one click of the button.
Another awesome feature is their Retirement Planning Calculator. It uses your real inputs to run a Monte Carlo simulation to best estimate your retirement financials. Definitely see how you stand!
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Also pick up my Wall Street Journal bestseller, Buy This, Not That, if you want an unfair competitive advantage to building wealth. Why The Median 401(k) Retirement Balance Is So Low is a FS original post.
Matthew Urban says
Hello. Enjoy reading articles on your website. What made significant difference in my 401K value was taking advantage of a Self Directed Brokerage Account feature. Chose to follow gut instincts then buy and hold attitude; a wild ride but has paid dividends. Guess I was very risk tolerant; not for everybody, and confirmed in talking in general to others. Found my approach to be very unusual and full of risks.
This is a late-to-the-party comment, but aren’t these median 401(k) values based on accounts and not individuals? My 24 year-old daughter has a $2,000 401(k) from her first employer, a $4,000 balance in a second account from her current employer and a $12,000 Roth IRA that she is funding with savings after maxing out her employer 401(k) match. I think that some of these things would note an average balance of $3,000 from the 2 401(k) accounts, and 10 years from now when her 2nd account is $100,000 and first is $4,000, the data may interpret that as an average account situation of $52,000. Am I wrong that these old accounts are throwing the data off?
My thought too. I converted a 401k with a previous employer to an IRA for lower fees. That money disappears in these stats but it’s still a component of my savings.
In the case study that said:
“ 7 years ago at age 37 in 2008 I had $125,000 in my 401k and then….BOOM! Stock market crashed and my 401k 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 ”
What is not mentioned is that he MUST have made a horrible mistake in either stopping/slowing his contributions during a market “crash”, and/or switching his allocations to something more “conservative” during the “crash”. I have been 100% S&P 500, never flinched, kept dollar cost averaging in throughout every recession/“crash” in the last 20 years, and it has never take me anywhere near 7+ years to get back above any local mins. My returns have also crushed REIT so idk why you are so big on REITs, but most of what you say otherwise I agree with.
Financial Samurai says
Thanks for pointing this out. 7 years later was actually 2015 for this fella. Obviously, if he kept investing, his portfolio would be much higher today.
However, the still doesn’t nullify the point that a divorce set him back.
Regarding asset class performance over the past 20 years, REITs have actually performed best. Here’s the data from JP Morgan Asset Management.
But even better, is owning physical property with leverage, tax deductions, rental income appreciation and so forth. It’s much easier to take big positions with real estate, which may end up creating much more wealth than buying an S&P 500 index fund.
There are many ways to peel a mango! The one thing is that investors have made so much money since the start of the pandemic that many are living it up in the YOLO Economy and taking things down a notch.
Personally, I’m taking a sabbatical for a couple months b/c there’s no need to work as hard for money anymore.
You have great financial advice but a lot of your projections are based on people starting work after college. Have you though about doing a few articles catered toward those with late starts due to long education (lawyers, physicians, PhDs, etc)? I think a lot of your readers fall into these categories.
Financial Samurai says
Yes, you would use the Years Worked column instead of the age column. And where there is no Years Worked column, then you would do the calculation yourself to match up the figures in the chart.
I’ll add more Years Worked column in future charts.