An Average American’s 401(k) Balance
One size doesn’t fit all, especially when it comes to retirement planning. Average 401(k) balances fluctuate across age groups, and understanding target savings rates can help you tailor your retirement strategy accordingly.
Before we break it down by age, there are a few key points to keep in mind that apply to all age groups:
- Asset allocation and diversification are essential to mitigate financial risk and loss. Putting all your eggs in one basket opens you up to significant risk. You might consider working with a financial advisor to balance your portfolio across stocks, bonds, cash, and other assets to match your strategy with your risk tolerance and relevant time horizon.
- If your employer offers an employer match, aim to contribute enough to your 401(k) to at least get that match, as it’s essentially free money that you don’t want to leave on the table.
- In addition to your 401(k), you may consider also contributing to an IRA account. An IRA, or Individual Retirement Account, is another type of retirement account with lower contribution limits relative to a 401(k). But it is not tied to an employer, so you can keep your traditional IRA or Roth IRA regardless of whether you change jobs. This investment account can help you maximize savings for retirement by investing funds beyond your 401(k).
Let’s now delve into the typical 401(k) balances and contribution rates for different age groups, according to Fidelity Investments and Vanguard.
Your Twenties (Age 20 to 29)
If you’re a twenty-something, you belong to Generation Z, and were born between 1997 and 2012 (or the tail end of the Millennial generation if you’re in your late 20s). With decades of savings ahead of you, it’s important to start early to make the magic of compounding work in your favor.
The average 20 to 29-year-old’s 401(k) contribution rate is the starting point of their retirement journey. The critical factor to remember here is the power of compound interest. Even modest contributions made early on in one’s career can grow exponentially over time, thanks to the power of compounding and compound interest. This generation has time on its side to maximize their 401(k) account balance.
- According to Fidelity, the average account balance in a 401(k) for 20-29 year-olds is $10,500.
Your Thirties (Age 30 to 39)
Millennials born between 1981 and 1996 have started to grow their 401(k) compared to their savings in their early 20s, on average. Your 30s are a crucial time to maximize your earning potential and avoid cashing out a 401(k) early. In your 30s, an increase in your contribution rate can significantly impact your final retirement account balance. Remember, the IRS sets the maximum contribution limit to your 401(k), and it’s a good idea to aim to contribute the maximum if possible.
- According to Fidelity, the average account balance in a 401(k) for 30-39 year-olds is $38,400.
Your Forties (Age 40 to 49)
Your forties are often marked by peak earnings, providing an excellent opportunity to maximize your retirement savings. The average American in this age group, usually part of the early Millennial generation or Generation X (born between 1965 and 1980), typically sees an even more significant increase in their average 401(k) balance.
This stage is an excellent time to reassess your financial goals and retirement plans. As you’re inching closer to retirement, understanding your financial benchmark and adjusting your contributions and investment strategies accordingly can ensure you’re on track.
- According to Fidelity, the average account balance in a 401(k) for 40-49 year-olds is $93,400.
Your Fifties (Age 50 to 59)
This age group, often part of Generation X, should ideally see a substantial average 401(k) balance. The average contribution rate typically also increases in this decade. When you reach your 50s, you become eligible for catch-up contributions. The IRS allows you to make additional contributions to your 401(k) to significantly bolster your retirement savings.
- According to Fidelity, the average account balance in a 401(k) for 50-59 year-olds is $160,000.
Your Sixties (60-69)
The average American’s 401(k) balance continues to increase in this decade. Many people in their 60s are part of the Baby Boomer generation (born between 1946-1964) and are now at the cusp of retirement or may have already retired. In this stage, managing withdrawals from your retirement account and ensuring you have sufficient retirement income becomes critical.
- According to Fidelity, the average account balance in a 401(k) for 60-69 year-olds is $182,100.
Your Seventies (70-79)
Once you reach your 70s, you’ll need to start withdrawing your retirement savings. The average 401(k) balance might be declining at this point, but the key is to ensure that your withdrawals are sustainable and can support your lifestyle.
Understanding the Required Minimum Distribution (RMD) rules is essential at this age. The IRS mandates that you start making withdrawals from your retirement account once you turn 73, which are subject to specific rules. So, it’s essential to plan your withdrawals in a manner that maximizes your retirement income while minimizing your tax liability.
- According to Fidelity, the average account balance in a 401(k) for 70-79 year-olds is $171,400.
How Much Money is Needed to Retire?
The million-dollar question is, how much money do you need to retire? There isn’t a one-size-fits-all answer to this. It largely depends on your lifestyle, financial goals, and personal finance situation. However, a common rule of thumb is the 4% rule.
The 4% rule suggests that you should withdraw 4% of your retirement savings in the first year of retirement and adjust that amount each year for inflation. For example, if you have $1 million in your savings account, you would withdraw $40,000 in the first year. From there, you’d withdraw an inflation-adjusted amount in the following year.
Another rule of thumb is to aim to have eight times your annual salary saved by age 60.
There are a few key details that are often overlooked in the retirement planning process:
- Healthcare expenses. As we age, medical costs can be a significant portion of our annual expenditure, and it’s essential to account for this in your savings plan.
- Inflation. Remember that the purchasing power of your money will decrease over time, so $100,000 today is not the same value it will be in 20, 30, or 40 years. So, your projected investment returns and brokerage account balance must be considered with this in mind.
Work with a financial advisor or plan provider to develop your savings goals, a contribution plan, and a savings rate target.
The Role of Social Security in Retirement Planning
Social Security benefits serve as a cornerstone for many people’s retirement income. Like an annuity, Social Security will act as a source of income will last your entire lifespan in retirement.
However, it’s essential to understand when these benefits become available and their limitations. While Social Security can provide a steady source of income during your golden years, it isn’t designed to be your only source of retirement income.
Social Security benefits can typically be claimed as early as age 62, but the full retirement age when you can claim full benefits is between 66 and 67, depending on the year you were born. Waiting even longer — all the way until age 70 — can increase your benefits further.
Despite this, Social Security shouldn’t be seen as a catch-all solution for retirement income. The average balance might not be sufficient to support your desired lifestyle in retirement. Hence, supplementing Social Security with personal savings and other sources of income is often necessary for a comfortable retirement.
Tips for Boosting Retirement Savings
Boosting your retirement savings is critical to ensuring a comfortable retirement. This involves a combination of:
- Saving aggressively. Every additional dollar you save today can compound over time, helping you build a larger nest egg. This is particularly true if your employer matches your contributions. In essence, an employer match is like getting “free money” that can boost your retirement savings. The sooner you start saving, and the more you save, the better off you’ll be in retirement.
- Working longer. Even a few extra years of work can substantially increase your retirement savings and reduce the number of years you need to live off those savings. This doesn’t necessarily mean working full-time until you’re 70. Even part-time work can help you delay tapping into your retirement savings and could increase the benefits you receive from Social Security.
- Making wise investment choices that adjust for risk as you get closer to your retirement age.
Bottom Line: Need Help Rolling Over Your Old Retirement Account?
Retirement planning is crucial for ensuring a comfortable future. Taking control of your retirement savings, setting financial goals, and staying committed to your financial plan can make a significant difference.
Balancing your brokerage accounts, 401(k)s, credit cards, student loan debts, real estate, and other financial obligations can be complex, and working with a financial advisor who can guide you is always helpful.
If you’re looking for support with a rollover, Capitalize is a valuable resource and service that is here to help. We can help you take steps toward a secure financial future by finding your old retirement accounts and completing the rollover process for you.
Learn more about the process today.
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