Latest 401(k) Balance By Age Versus Recommended Amount For A Comfortable Retirement

According to Fidelity, as of end-2020, the latest average 401(k) account balance is $106,500. Fidelity holds 16.2 million 401(k) accounts, including my Solo 401(k). Fidelity is consistently ranked as one of the largest 401(k) providers in the country. The latest 401(k) balance by age naturally increases the older one gets.

The median 401(k) account balance, on the other hand, is a paltry $24,800. It’s clear that despite an enormous bull run since the 2009 lows, not enough Americans are saving for retirement or don’t have pre-tax retirement plans like a 401(k). I’m sure it’s a combination of both.

What I’d like to do is compare the latest average 401(k) balance by age with my recommended average 401(k) balance by age for financial independence seekers. Let’s see how big the differences are so we can explain how important it is for everybody to focus on their finances.

The 401(k) account is one leg of the new three-legged stool for retirement. The other two legs are post-tax savings accounts and personal hustle. It’s important to never depend on the government or anyone for your financial future.

Latest Average 401(k) Balance By Age

Below are the latest 401(k) balances by age according to Fidelity. After a steep 32% S&P 500 drop in March 2020, the S&P 500 has rebounded and is now at an all-time high.

Ages 20-29: Average balance: $11,600, Median balance: $4,000.

After spending so much time in school, the last thing many young folks think about is saving for retirement. Further, because they’re just starting to make money, their marginal tax rate is likely to be the lowest of their entire career. As a result, their desire to contribute to a 401(k) isn’t very high.

That said, it’s important to get into the discipline of saving aggressively and saving often. If you are able to have or develop good financial habits in your 20s, these habits will continue for the rest of your life and make you wealthier.

Related: Achieving Financial Independence On A Modest Income: $40,000 In Manhattan

Ages 30-39: Average balance: $43,600. Median balance: $16,500.

Your 30s is a time for great career growth after spending your 20s learning. Not only should you be earning more, but you should also finally be able to regularly max out your 401(k).

Besides career and income growth, you are likely considering where to establish roots. Buying a primary residence and settling down with a life partner are two items high in consideration.

Ages 40-49: Average balance: $106,200, Median balance: $36,900.

You should be entering your peak earnings years in your 40s. Maxing out your 401(k) should come naturally, but for some reason, life somehow always gets in the way.

Maybe your housing costs are dragging you down. Maybe you went through a costly divorce. Or maybe the cost of raising children is more expensive than you realized.

Beating the latest 401(k) balance by age is extremely important in your 40s because you are in your highest earning years. Now is the time to contribute the maximum to your 401(k).

Ages 50-59: Average balance: $179,100. Median balance: $62,700.

You finally see the retirement finish line. Participants age 50 and older can contribute an extra $6,000 a year in 2019. This catchup contribution is a 31.5% annual boost, which should be put to good use.

Here’s a chart that shows the historical 401(k) contribution limits. As you can see, the employer can contribute a heck of a lot more than you can if they are so generous.

The maximum 401(k) contribution in 2021 is $19,500. Let’s hope it goes up to $20,000 in 2022.

Ages 60-69: Average balance: $198,600. Median balance: $63,000.

You’re finally able to withdraw from your 401(k) without a 10% penalty. If you live frugally on only $30,000 a year, you can withdraw from an average balance of $198,600 for 6.5 years before you completely run out of money.

If you so happen to have only the median 401(k) balance of $63,000 at the age of 60, you will likely have to continue working for many more years, if not forever.

Ages 70+: Average: $186,800, Median: $52,400.

Given the median life expectancy is around 78 for men and 80 for women, we’ve finally come to an age group where the average 401(k) balance makes more sense.

Folks in their 70s are receiving Social Security and many of them have a pension as well from the good old days. If all debt is paid off, having much more than $200,000 at this age probably isn’t necessary.

The Recommended Average 401(k) Balance By Age

It should be clear by now that the average 401(k) balance for each age group below 70 is too low to afford a comfortable lifestyle in retirement. I can understand the low balance in one’s 20s, but by one’s 30s, everybody should be able to comfortably max out their 401(k) each year.

After a 16-day government shutdown in 2013, 64 percent of Federal workers said they had less than two weeks’ worth of savings set aside. With the government shutdown in 2019, one career survey highlighted that almost 80 percent of Americans live paycheck to paycheck. That’s nuts!

Let’s now compare the latest average 401(k) balance by age in America with the recommended 401(k) balance for those who wish to enjoy a comfortable retirement.

The assumptions for the below chart are as follows:

* The Guide For Older Savers column accounts for lower maximum contribution amounts available to savers above 45. The column can also be used for more conservative returns.

* The Guide For Middle Age Savers column accounts for lower maximum contribution amounts available to savers below 45. The column can also be used for moderate returns.

* The Guide For Younger Age Savers column accounts for savers who are under the age of 25. They have higher maximum contribution amounts and can be used for more aggressive returns. After the first year, one maximizes their contribution every year to their 401(k) plan without failure.

* Average starting working age is 22. But you can follow the number of years working as a different guideline if you graduate later or earlier.

* $18,000 is used as the conservative base case maximum contribution amount for one’s entire working life. For 2020, the maximum contribution has increased to $19,500.

* The rate of return assumptions are between 0% – 10%. The asset allocation is based off a traditional asset allocation based on age.

* Company match assumption is between 0% – 100% of employee contribution. $56,000 a year is the total amount that can be contributed to a 401k by employee and employer for 2019 ($19,000 employee, $37,000 employer).

* The three recommended columns should successfully encapsulate about 80% of all 401K contributors who max out their contributions each year. 

Latest 401(k) Balance By Age Analysis

As you can see from the chart, the average American 401(k) balance starts off light compared to the recommended balance. The gap really widens over time due to the power of compounding. Let’s not even look at the median 401(k) balance column which is so pathetically light.

For a closer apples-to-apples comparison, you can compare the Average American Balance column to the Middle Age Savers column. In this comparison, the financially savvy investor will have greater than 10X more in his or her 401(k) by 60.

Please recognize the importance of consistent savings and compounding returns. Over a period of several decades, even a 1% difference in returns or savings rate makes a big difference.

Eventual 401(k) Millionaires

My default assumption is that everybody should have at least $1,000,000 in their 401(k) by 60. The $1,000,000 can come from various tax-advantegous retirement accounts. The range is between $1,000,000 – $5,000,000.

A $1,000,000 gross 401(k) account ends up being roughly $800,000 after-tax. Multiply $800,000 by 3% – 5% and you get between a $24,000 – $40,000 a year safe withdrawal rate. However, with interest rates plummeting post-pandemic, it’s wise to lower your safe withdrawal rate further.

Depending on where you live and how luxurious you want your retirement to be, $24,000 – $40,000 a year may not be enough. If you plan to retire in a high cost of living area like San Francisco, having 5X that amount for spending might be more appropriate.

In addition to building a big 401(k) balance, develop a large taxable investment portfolio as well. You want to build enough capital to generate passive income.

Passive income is the holy grail of financial freedom. Once you have enough, you are free to do whatever you want well before age 59.5.

Now that you know the latest 401(k) balance by age, it’s time for you to thoroughly beat the median and average figures!

Diversify Your Investments Into Real Estate

Contributing the maximum to your 401(k) is highly recommended. However, the funds cannot be touched without a 10% penalty until age 59.5. Therefore, it’s important to also invest in taxable portfolios and real estate.

Real estate is my favorite asset class to build wealth. It is a tangible asset that is less volatile, provides utility, and generates income. If you want to earn income you can tap now while also diversifying your investments, real estate is it.

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.

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore. 

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 easiest way to gain real estate exposure. 

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 401(k)

Track your finances for free in one place with Personal Capital, the web’s #1 financial app. You can analyze your 401(k) for excessive fees. Further, you can track your net worth so you can better optimize your money.

Make sure your investments are properly allocated based on your risk tolerance. With Personal Capital’s Retirement Planner, you can better plan for your financial future. I’ve used them since 2012 and have seen my net worth skyrocket.