The majority of Americans who haven’t saved for retirement are counting on Social Security for the bulk of their income in retirement. However, that is an increasingly risky bet. As more of the massive Baby Boomer generation retire, the Social Security fund is being drained. It has begun dipping into its reserves to make monthly payments, and many projections indicate that the fund may be depleted completely by 2034. Therefore, Generation Xers and millennials can expect smaller Social Security payouts, if any, which are not likely to cover their expenses when considering inflation and rising costs of living. Investing in a 401(k) is more critical now than ever.
Average 401(k) Balance By Age
*Based on statistics from “Building Financial Futures 2020” from Fidelity.
Retirement can feel like the distant future at the beginning of your career, and other investments often appear more relevant and/or attractive to young workers. However, the best way to ensure your financial security and maximize tax benefits and employer contributions (when relevant), is to begin investing in a 401(k) as soon as you begin regular employment. Unfortunately, many young people do not invest in a retirement plan at all during their initial decade/decades of employment or only invest minimal amounts.
The below data, based on statistics from the leading 401(k) provider Fidelity, shows both the average and median amounts Americans invest in their 401(k)s by age group.
Average 401(k) balance: $13,200
Median 401(k) balance: $5,000
Fidelity recommends accruing an amount equal to at least one annual salary in your retirement account by age thirty. For example, if your annual salary is $50,000, you should have saved at least $50,000 in your 401(k) by age 30.
Average 401(k) balance: $46,200
Median 401(k) balance: $18,500
Fidelity recommends accruing an amount equal to at least three annual salaries in your retirement account by age forty. Therefore, if your annual income is still $50,000, you should have $150,000 in your 401(k) by the end of this decade. This can be challenging, as expenses often skyrocket during this period of your life due to the birth of children and/or mortgages and other housing expenses. Investing raises and bonuses in retirement savings rather than other expenses can keep you from falling behind during this critical decade.
Average 401(k) balance: $111,100
Median 401(k) balance: $39,200
By age fifty, retirement is getting closer, and Fidelity recommends that you accrue an amount equal to six times your annual income by that time. Statistics indicate that only a small minority of Americans are hitting that goal.
Average 401(k) balance: $188,100
Median 401(k) balance: $65,300
By the time you reach sixty, retirement is around the corner and Fidelity recommends that you have eight times your current salary saved up. If you have fallen behind in previous decades, your fifties are a good time to catch up, as the contribution ceiling is higher for people over fifty. For employees under fifty, the 2020 contribution limit is $19,500 but people 50 and older can add another $6,500 to that amount, for a total of $26,000 annually.
Average 401(k) balance: $212,600
Median 401(k) balance: $67,600
Many Americans retire during this decade, making it is the last opportunity to save for retirement. Therefore, it is a good idea to calculate your total yearly expenses and then multiply that amount by 30, assuming that you live to a ripe old age. The calculation doesn’t take into account investment earnings, inflation, or unexpected expenses, but it will give you an idea of how much more you need to save and perhaps encourage you to increase your investment in your 401(k) as you prepare to retire. Sadly, the data shows that most Americans haven’t saved anywhere near what they need in order to retire comfortably.
Average 401(k) Balance By Income Level
*Based on Vanguard’s “How America Saves” annual report for 2020
The below statistics, provided by Vanguard, show how little America’s neediest citizens are saving. While Americans with an income of $150,000 or more have saved a median of $76,448, Americans who earn less than $15,000 have a median savings of a mere $1,376, less than a drop in the retirement bucket. Saving for retirement is not easy when your income is low, but even small savings can be significant over time, especially when supplemented by employer matching.
Income Level: Less than $15,000
Average 401(k) balance: $15,843
Median 401(k) balance: $1,376
Income Level: $15,000 – $29,999
Average 401(k) balance: $10,283
Median 401(k) balance: $2,678
Income Level: $30,000 – $49,999
Average 401(k) balance: $22,679
Median 401(k) balance: $6,909
Income Level: $50,000 – $74,999
Average 401(k) balance: $54,588
Median 401(k) balance: $21,359
Income Level: $75,000 – $99,9999
Average 401(k) balance: $92,596
Median 401(k) balance: $41,507
Income Level: $100,000 – $149,000
Average 401(k) balance: $137,058
Median 401(k) balance: $61,635
Income Level: $150,000 and above
Average 401(k) balance: $193,130
Median 401(k) balance: $76,448
Breaking It Down: Where Do You Stack Up?
6 Best Strategies to Boost Your Retirement Savings
Understand when you want to retire: When choosing the best retirement savings plan for your needs, it is important to think about when you want to retire. If you enjoy your work, and it does not require hard physical labor, you may aim to work well into your seventies and feel comfortable investing less in your 401(k) or retirement savings plan every month. However, things don’t always go according to plan, and therefore it is a good idea to give yourself a safety cushion. Even if you don’t plan to retire when you turn 65, unexpected health or personal problems may force you to do so. Increasing your investment in your 401(k) will ensure that you are covered if you need to retire earlier than you planned.
Meet with a financial advisor to discuss your goals: General advice is helpful, but at the end of the day, each person’s situation is unique. A qualified financial advisor can review the specifics of your financials, and recommend options that fit your age, health, ability to manage risk, the projected scope of investment, dependents, and more. For example, a person at the beginning of his/her career may benefit from different options than someone with a short retirement runway, and a person with a secure, tenured position may require a different plan than someone working in a more volatile profession.
Take full advantage of your employer’s 401(k) match: If your employer offers a 401(k) with match funding, and you aren’t contributing to the fund in full, you are basically giving away money. In matching programs, employers match what you yourself invest in your fund, so the less you put in, the less they invest. It may seem impossible to invest the full amount—life is full of burdensome and sometimes unexpected expenses such as medical bills or college tuition that may lead you to reduce your investment in your 401(k). However, the less you invest, the less your employer is putting in. Therefore, it is always a good idea to make saving for retirement a top priority in your monthly budget.
Reduce or pay off debt: The average credit card rate or interest rate on loans far exceeds the stock market’s historic average annual return, which reflects the earnings you can expect to receive from your 401(k). Therefore, even if you have saved for retirement, if you have also incurred debt you can get caught in a cycle in which the interest rates on your debt outpace your earnings from retirement investments. It is recommended that you prioritize reducing or paying off your debt over your investments in retirement plans. If possible, it’s best to do both.
Contribute to an IRA: Like 401(k)s, IRAs offer valuable tax benefits. However, rather than being opened by employers, they can be opened by individuals through brokers or banks. If your employer offers a 401(k) with an employer match, it makes sense to invest enough in your 401(k) to maximize the employer match. Once you have received the maximum match, or if your employer does not offer a match, you may want to consider investing in an IRA, where there is a larger selection of investment opportunities and fewer administrative fees than in most 401(k)s.
Develop other sources of income: Like in all investments, it is always a good idea to diversify when saving for retirement. 401(k)s have the advantage of being tax-exempt, but they are not risk-free. Therefore, if you have the option to supplement your retirement income with an alternative investment such as a rental property, you can protect yourself from stock market fluctuations and other market fluctuations that may impact your 401(k).
The Bottom Line
Projections show that the value of Social Security payments for Gen Xers and Millennials will not be enough to support them in retirement when taking the rising cost of living into account. Therefore, it is critical that pre-retirees invest in a 401(k), or in other tax-sheltered retirement savings plans such as IRAs. If your employer has a matching option, it is a good idea to maximize your 401(k) investment at least to the matching maximum in order to utilize your full benefits. Likewise, it is important to minimize debt, as the interest rates on debt often surpass the income from retirement savings plans.
No matter how old you are, retirement is coming, and there is no better time to start saving than right now.