401ks are one of the most common investment vehicles that Americans use to save for retirement. The 401k is an employer-sponsored plan that allows you to save for retirement in a tax-sheltered way (up to $18,500 per year in 2018, with a $6,000 catch-up contribution limit) to help maximize your retirement dollars.
What Could You be Saving?
If you were maxing out your 401k (at the current contribution limit of $18,500/year), had an employer match, and started full-time employment at age 22, you could, in theory, have between $507,500 (with no growth) and $2,230,034 (with compounding and 8.8% growth*) saved for retirement by age 50**.
Needless to say, this is not a realistic scenario for many people. Life presents us all with different challenges – we don’t all start saving into our 401ks at 22, or we have unexpected medical expenses, decide to go back to school, or encounter other financial emergencies. These are all perfectly valid reasons for why you might be falling behind with your retirement savings.
The Average 401k Balance by Age
So, how much does the average American actually have saved towards retirement? And how do your own savings compare to the average American?
Take this free 401k assessment to see how you stack up.
This chart shows the actual estimated average 401k balance by age (middle column) and median 401k balance by age (right column):
| AGE | AVERAGE 401K BALANCE | MEDIAN 401K BALANCE |
|---|---|---|
| <25 | $4,154.00 | $1,325.00 |
| 25-34 | $22,256.00 | $8,192.00 |
| 35-44 | $61,631.00 | $23,491.00 |
| 45-54 | $116,699.00 | $43,467.00 |
| 55-64 | $178,963.00 | $66,643.00 |
| 65+ | $196,907.00 | $60,724.00 |
*Source: https://pressroom.vanguard.com/nonindexed/How-America-Saves-2017.pdf
While these numbers seem low based on what people could have saved, our recent survey actually found that nearly two in five pre-retirees (37%) have no money saved for retirement. This is even more alarming when we consider that 54% of Americans believe they will need more than $1 million to retire comfortably, and half of pre-retirees (51%) want to retire at age 65 or younger.
But the good news is, while people are falling way below their savings potential, it’s not too late to turn things around.
5 Steps to Take Now When it Comes to Your Retirement
- Save early, often, and aggressively. 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 are able to. The earlier and more aggressively you save, the better off you will be. Compounding can do wonders when there is a positive annual return.
- Don’t rely on Social Security. We found that a quarter of Americans expect Social Security to be their primary source of income during retirement. Yet according to The United States Social Security Administration, Social Security is on track to be depleted by 2034, paying only 79% of benefits (from ongoing tax revenue). With half of Americans (51%) planning to retire at 65 or younger, it’s crucial to save in other investment vehicles in order to maintain your desired lifestyle in retirement.
- 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 situation. 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.
- 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 retirement accounts. 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?
- 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 financial life. An online retirement calculator and planner can help you track your progress toward your retirement goals and scenario plan. If working with a financial advisor is an option for you, this can be an invaluable resource, especially as you get closer to retirement.
Understanding where you are spending, saving, and what your lifestyle costs are is crucial to your overall retirement planning objectives. If you feel overwhelmed by the prospect of saving for retirement, taking stock of the state of your finances is the first step that you can take towards getting a handle on your retirement planning. And you can do it starting today.
* Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%; Personal Capital’s Aggressive Growth Approach aims for 8.8% growth.
**These numbers are more forward-looking vs. backward, since 401k contribution limits were lower in the past (in fact, in 2018, the limit was raised $500 from 2017). This also assumes that you start full-time employment at age 22 at a company that provides a 401k, without a company match and you contribute $8,000 to your 401k after the first year, then from the second year onward, you contribute the maximum annual amount of $18,500.
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 an
