401k plans are one of the most common investment vehicles that Americans use to save for retirement. For most of us, the 401k is an employer-sponsored plan that allows you to save for retirement in a tax-sheltered way (up to $19,500 per year in 2020) to help maximize your retirement dollars.
If your employer offers a 401k and you are not utilizing it, you may be leaving money on the table – especially if your employer matches your contributions. While the 401k is one of the best available retirement saving options for many people, only 32% of Americans are investing in one, according to the U.S. Census Bureau (as of 2017). That is staggering given the number of employees who have access to one (59% of Americans).
We are constantly being reminded that there is a retirement crisis in America — according to a Personal Capital-sponsored study conducted by ORC International, nearly two in five (37%) pre-retirees have no money saved for retirement. While a majority of Americans (63%) with full-time or part-time employment participate in an employer-sponsored retirement program, just 21% max it out.
So, what does this mean in terms of how much people actually have saved in their 401k plans, and how does this stack up against what they could have saved if they were maxing out their 401k’s every year?
A note on recent market volatility as it pertains to 401k savers: The following average and median 401k numbers were calculated prior to the 2020 bear market that began in late February. While this is a scary time for retirement savers, if you are able to and have decades before you retire, consider using this as an opportunity to increase your 401k contributions. Of course, we don’t know if markets will continue to go down in the near-term, but it gives you the opportunity to buy stocks at much lower prices than just a few weeks ago.
How are you tracking towards your retirement goals? Using Personal Capital’s free Retirement Planner tool, get a percent chance of your success at achieving the retirement you want. Learn more about Retirement Planner here.
401k Savings Potential by Age
The following chart depicts 401k savings potential by age, based on several assumptions. So this is how much you could have saved. While these numbers can seem high to many people (especially if you are older and started your retirement savings when the contribution limit was much lower,) it can be used as a guide for your target total retirement savings amounts, including your IRA, Roth IRA, and after-tax savings. While it’s designed for one person, it can also be used as a guide for a married couple if one spouse decides to no longer work.
The assumptions we used for this chart include:
- The numbers are more forward-looking vs. backward, since 401k contribution limits were lower in the past (in fact, this year, the limit was raised $500 from 2019).
- You start full-time employment at age 22 at a company that provides a 401k, without a company match.
- You contribute $8,000 to your 401k after the first year, then from the second year onward, you contribute the maximum annual amount of $19,500.
- The “No Growth” column shows what you could potentially have in your 401k after so many years of a constant $19,500-per-year contribution and no growth.
- The “8% Growth”* column shows what you could potentially have in your 401k after so many years of a constant $19,500-per year contribution (ignoring catch-up contributions but those over age 50 can actually add an extra $6,000 per year into a 401k) compounded over the next 43 years.
- The difference between the two columns emphasizes the power of growth, compounding over time. By starting early and enjoying historically average returns, at age 65, an individual could turn $827,000 of contributions into over $6.6M dollars.
|AGE||YEARS WORKED||NO GROWTH||8% GROWTH|
*Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%.
So, how do you stack up? Are you on the high end? The low end? Do you think these numbers are realistic?
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Breaking it Down: Where Do You Fit In?
There are many reasons you might think this chart seems totally reasonable, or, conversely, totally unreasonable. And that’s understandable. Life presents us all with different challenges – we have unexpected medical expenses, decide to go back to school, or have kids and want to pay their college tuitions. These are all perfectly valid excuses as to why you might be falling behind where this chart says you should, or could, be.
Based on this chart, you would think that most Americans should be retiring as multi-millionaires at age 65. This probably seems way off-base, and in reality, it is — most people retire with very little in the way of savings and investments. The point is that this chart shows what is possible if you are disciplined and strategic about your 401k savings.
If you are on the younger end of the ages shown on the chart, you may be daunted at the prospect of contributing $8,000 per year to your 401k, not to mention $19,500. Depending on where you live, what your first-year salary is, or whether you are paying off student loans can make it difficult for this contribution to seem realistic. It’s crucial, however, to recognize the importance of saving as much as you can for retirement as early as you can.
To illustrate why retirement saving should be a top priority in your monthly budget, let’s think about the implications of this chart for when you are 65 years old, you no longer want to save, and are about to retire. The question then becomes: “Do I have enough saved to retire comfortably?”
So, let’s determine, based on the two scenarios in the potential savings chart, whether these figures would be sufficient to support your lifestyle for the rest of your retirement.
The average life expectancy for men is around 84 years old, and 86.5 years old for women.
Let’s say you are retiring at age 65. If you take the numbers at the low and high end of the chart, then divide by 22 (the approximate number of years you might expect to live if you retire at 65), you get $37,590 on the low end to a whopping $300,458 on the high end, to spend annually for the rest of your life.
If you add maximum Social Security Benefits ($34,284 assuming you retire at age 65 in 2020), you may increase your take home amount to $71,874 to $334,742 per year.
$71,874 may seem like quite a bit, but remember, inflation can throw a wrench into this and make your money less valuable in the future. Also, Social Security benefits may decrease or be gone altogether by the time Millennials and Gen-Zers retire.
Assumptions vs. Reality: The Actual 401k Balance by Age
Hopefully, you find yourself somewhere on the “potential savings” chart, but if you don’t, you are not alone. Take a look at this chart showing the actual estimated average 401k balance by age. Let’s start with the latest numbers from Vanguard, one of the largest 401k plan administrators in the country.
|AGE||AVERAGE 401K BALANCE||MEDIAN 401K BALANCE|
The average Personal Capital user* is ahead of the curve when it comes to 401k savings, but they too fall below the projected savings chart:
|AGE||AVERAGE 401K BALANCE||MEDIAN 401K BALANCE|
*Note: Averages are rounded up to the nearest dollar. Numbers are based on aggregated and anonymous data from the Personal Capital dashboard. Methodolgy: Accounts included are the following: 401k, former employer, roth 401k. Excludes test and invalid accounts. Excludes any account value greater than $100,000,000 or less than -$100,000,00. Excludes spouse accounts. Snapshotted balance as of 1/31/2020.
Average 401k Balance at Age 22-24 – $20,498; Median – $11,685
The average 401k balance at age 22-24 is $20,498. This is actually pretty impressive, and indicates that young people using the Personal Capital dashboard are taking their retirement savings seriously. When you’re in your early 20’s, if you’ve paid down any high-interest debt, endeavor to save as much as you can into your 401k. The earlier you start, the better. As you can see from the potential savings chart, compounding interest is no joke!
Average 401k Balance at Age 25-34 – $77,130; Median $47,194
When you’re in your late 20’s and early 30’s, this is the time to make sure you are aggressively paying down any non-mortgage debt. If you still have high-interest debt, you may be earning 8% in your retirement account, but might be paying 20% or more in credit card interest.
Average 401k Balance at Age 35-44 – $197,956; Median $121,352
If you haven’t already started to max out your 401k by this age, then really start thinking about what changes you can make to get as close as possible to that $19,500 per year contribution. You don’t want to lose out on years of compounding interest!
Average 401k Balance at Age 45-54 – $371,322; Median $220,188
When you hit your 50’s, you become eligible to make larger contributions towards retirement accounts. These are called “catch-up contributions” – make sure that you take advantage of them! Catch-up contributions are $6,500 in 2020. So if you contribute the annual limit of $19,500 plus your catch-up contribution of $6,500, that’s a total of $26,000 tax-deferred dollars you could be saving towards your retirement.
Average 401k Balance at Age 55-64 – $496,853; Median – $292,208
By your late 50’s or early 60’s, you should have a better idea of what retirement could look like for you and what it really means for you to be “retired”. Do you want to keep working as long as you can? Would you like to slow down? What are your Social Security benefits and when is the optimal age to start taking them? Are you eligible for spousal or survivor benefits?
Average 401k Balance at Age 65+ – $422,960; Median – $165,740
The most common age to retire in the U.S. is 62, so it’s not surprising to see the average and median 401k balance figures start to decline after age 65. Once you reach age 65, there are still several considerations for your retirement, even if you are no longer working and accumulating wealth. Some of these include making decisions about Medicare, creating a plan around withdrawing money from your retirement accounts, and evaluating any additional insurance needs.
5 Steps to Take Now to Improve Your Retirement Readiness
While the average 401k balance at pre-retirement age (55-65) is around $500K, that balance still falls far below even the “no growth” column of the savings potential chart for the same age. And while $500,000 is no chump change, it’s also probably not enough to retire comfortably for most people.
Needless to say, many people are falling way below their savings potential. But the good news is, it’s not too late to turn things around.
- Save early, often, and aggressively. Yes, saving is hard. It’s hard when you are young and not making a large salary, and it’s hard when you’re older and big life expenses get in the way. However, the biggest threat to your retirement is inaction. Even if it’s uncomfortable to max out your 401k, do it if you can. If you get a salary raise, immediately put 50% of it towards savings if you’re able. The earlier and more aggressively you can save, the better off you will be, and you may even surprise yourself with how much you are able to put away. Compounding can do wonders when there is a positive annual return as you can see from the high end of the potential savings chart, so the earlier you can save more, the farther your money will go.
- Don’t rely only on Social Security. Based on Personal Capital’s recent retirement survey, we found that a quarter of Americans expect Social Security to be their primary source of income during retirement. With half of Americans (51%) planning to retire at 65 or younger, it’s crucial to save in other investment vehicles, such as a 401k, in order to maintain your desired lifestyle in retirement. According to the United States Social Security Administration, Social Security is on track to be depleted by 2034, at which point they will begin paying a portion of the benefits from ongoing tax revenue. Don’t rely solely on Social Security; it may not fully be there when you retire!
- Have a realistic understanding of when you want to retire. Having clearly defined goals will help you determine how much you should have saved based on your personal goals. Your savings objectives will be different if you plan to retire at 50 than if you plan to continue working past 70. Additionally, it’s important to determine as accurately as you can what your cost of living will be in retirement. How much do you need to spend per year to maintain the lifestyle that you want for the rest of your life? Have a good sense of what your costs will be so you can factor that into your overall retirement strategy. Really evaluate how long you want to continue working, and what retirement age is realistic for you based on your income and your current level of savings.
- Develop other sources of income. Think about other ways you can secure sources of income in retirement outside of collecting Social Security and withdrawing from your 401k. This will not only prevent you from having all your retirement eggs in one basket, but it is also something to consider if your 401k balance is lower than you’d like. Where can you invest and how can you optimize your portfolio for greater returns? Consider other ways you can supplement your retirement income, and speak to your financial advisor about what solutions could work for you.
- Leverage all the resources at your disposal. There are many tools available to help you understand your financial life in more detail, and when these tools are so readily available, not leveraging them can result in a huge blind spot when it comes to your finances. Simply having this information will help you understand if you are on the right track, and how to accelerate your progress on your retirement goals. If working with a financial advisor is an option for you, this can be an invaluable resource, especially as you get closer to retirement. A financial advisor who has your best interest in mind can help you strategize and address potential gaps in your savings and retirement income plans.
The point of this savings potential chart is not to discourage anyone if you, like many of your fellow Americans, do not fall somewhere in the defined 401k balance range. It is more to show you what is possible. Yes, you should try to max out your 401k every month, and beyond that, you should try to save in other ways as well. Even if you don’t think that’s possible for you, striving towards these goals and contributing as much as you can will get you closer to your targets than if you were to contribute very little or nothing at all.
Having a good understanding of where you are spending and saving, and having a holistic sense of what your lifestyle costs is crucial to your overall retirement planning objectives. If you feel overwhelmed by the prospect of saving for retirement, this is the first step that you can take towards getting a handle on your retirement planning. And you can do it today.
This article was updated with 2020 contribution limits on 3/13/2020. Disclaimer: The information on this website is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.