It took me awhile, but I finally compiled a data set that tracks the average 401(k) by age for American workers from age 25 through 67. It was difficult to get a full apples-to-apples comparison because some studies use premises like “assuming two years of employment with a job before calculating” and also the data sources rely on averages rather than medians which has the affect of an upward skew because people with millions of dollars in a 401(k) raise the numbers of what is “typical.”
My view is that it looks like a good chunk of Americans waste the opportunity in their late 30s to sock aside a meaningful amount for retirement. By age 35, the average American has a little over $32,000 in a 401(k). But over the next four years, the amount only goes up to $39,000. Without factoring in any capital appreciation, that suggests a monthly savings rate in the realm of $140-$150. Because we don’t know the investment gains for the typical investor between those ages, we can at least establish that this is the upper boundary.
I am also surprised by data points that show $10,000+ as an average for a worker in their mid-20s. That contradicts many conversations I’ve had with peers and my own horse sense of the typical experience for an American in their 20s. And yet, that is what the data set for everyone in their 20s says.
If the typical 401(k) investor is earning 4-6% across their entire account, then the implication is that the monthly savings is $110-$130. And the true savings is probably around $100 once employer matches are calculated (unfortunately, the data sets do not separate what percent of a 401(k) account comes from an employee’s own savings and what percent comes from the employer match.)
Based on these numbers, the typical retirement reality for most Americans is probably going to be: (1) Social Security; (2) some type of part-time employment; and (3) withdrawals of $1,000-$1,500 per month from their 401(k) with the hope that there will be some extra capital appreciation along they way as they make withdrawals.
And that is the good news. Not clearly indicated by the table is that 29% of Americans over the age of 55 have zero or de minimis retirement savings in the realm of hundreds of dollars.
It is covered regularly by media outlets, but shortcomings in 401(k) is going to be one of the two major financial crises over the next half-century (the other is municipal budgets which cannot support the strain of the current commitments and will need to raise taxes to shore up finances but the modern-world’s mobility means that many people will likely leave the municipality upon any substantial tax hike.) The effects of the 401(k) shortfalls isn’t evident yet because so many American retirees are collecting both Social Security and a pension such that the 401(k) money is analogous to a surplus rather than a core source of retirement spending.
The other caveat is that this data is current as of the second quarter in 2017. Well, this is a period that has covered eight years of bull markets to inflate the values of 401(k) accounts. Studies show that people respond inversely to market conditions by contributing more when the market has recently down well and contributing less when the market recently went down a bit. That means that this data incorporates above average contributions and above average growth rates in the actual investments.
What happens if we have another recessionary stock market in which people foolishly withdraw from their investments while simultaneously curb their contributions? We already know the answer to that, as the average 401(k) balance fell to the $50,000 range during the worst of 2009. That is always the central problem with unimpressive results during generally good economic conditions. When good times lead to inadequate results, you wonder what the figures will look like when already inadequate numbers meet hostile economic conditions.
The math isn’t that great for the best-in-class figures. The highest figure on the chart is the average 61 year-old who has a little bit above $91,000 in their 401(k). At a 3% yield, we are talking about a $2,730 annual or $227.50 monthly income. This is not an amount that can fund moderate lifestyles absent some other retirement funding source in addition to Social Security.
I know that personal finance tends to eschew bright-line rules because every individual has unique circumstances, and that is technically true. How you advise someone making $50,000 is necessarily going to be different than you how advise someone with a $250,000 annual income. But the cost of answering every question with “it depends upon your individual needs and circumstances” is that retirement investors are left guessing and have no reference points for whether they are above or behind where they need to be. And when there is no measurement point, you can easily sleepwalk through your investing career because there’s no “Whoops, I really need to catch up here” point before it is too late.
My view is that the investing public should receive an investing message along the lines of “Invest $500 every month from age 25 to 65 in the widest collection of businesses that your plan offers.” If you can’t save that in a given month, know that you need to make it up ASAP. And if you can save more, get ahead. If you do that and get 8% over a career (counting any employer match), then you would end up with a final 401(k) balance of $1,741,000.
Think about the implications of we arrive at the figure of the average 401(k) for a 61 year-old containing $91,000. Assuming a 7% return for 40 years, it only requires a $35 monthly investment to arrive at that figure. Now, of course, the 401(k) was not enacted into law until 1978, and it also takes any new investment vehicle a few years to go through its proof of concept phase before it receives widespread social acceptance. It is also possible that people with pension arrangements completely ignored 401(k) investing as something irrelevant to their personal circumstances.
The bad news is that much of the data hand-wringing about America’s retirement savings has a basis in fact. The average 401(k) are much below where I’d like them to be—I’d want to see the average 60 year-old having over $300,000 in investments and I’d like to see the top 25% have over $550,000 or so in 401(k) investments.
The good news is that, if you make this your goal, the hurdle is so low that you can overcome. You are being graded on a curve here. If you save up $500 per month, you’ll end up with over 17x the highest 401(k) account value by age right now. How many do you know who prioritize their retirement contributions? Just by making it one of your three most important financial decisions each month, you will get ahead of most of the pack. The real shame is that the tax code, and even some employers, bend over backwards to facilitate retirement savings and yet the untapped potential in corporate America’s 401(k) system remains staggering.