On Friday, May 24, Jeanne Sahadi published an article to CNN's website titled "Record number of 401(k) savers have balances over $1 million". The author deserves credit for an insightful article about the retirement savings of American households. However, the headline is misleading. We have a problem. Not enough people are saving for retirement, and those who are saving probably aren't saving enough.
Why should we care if we have more than $1 million in our retirement accounts? When you think about what your retirement looks like, it's easy to see how expensive it can be. Everyone has different dreams about their retirement, so it's important to talk to an advisor when determining how much money you will need before retiring. However, I'd be surprised if anyone calculates needing less than $1 million to last them through retirement. Whether or not you can rely on social security being available when you retire is beyond the scope of this writing.
Likely prompting Ms. Sahadi's article, Fidelity Investments said that the number of 401(k) accounts with balances greater than $1 million rose 15% from a year earlier to 485,000. Don't applaud just yet because this is only 2.1% of the 23 million retirement accounts held by Fidelity. This number is shockingly low to me. It gets worse. Of the 341.6 million people living in the United States as recorded during the last census, 255.5 million are eligible for retirement accounts, and the Federal Reserve estimates that only 50.5%, 129 million, actually have accounts. If only 2.1% of Fidelity's retirement accounts have balances over $1 million, does that really mean that only 2.7 million Americans (out of 255.5 million eligible) have retirement accounts exceeding this benchmark?
Yes, the number of retirement millionaires is too low, and the average 401(k) balances on accounts are too low. Based on data from Vanguard, this table shows the average and median 401(k) balances by age:
Age Range | Average 401(k) Balance | Median 401(k) Balance |
Under 25 | $6,264 | $2,240 |
25-34 | $37,211 | $15,048 |
35-44 | $97,020 | $36,117 |
45-54 | $179,200 | $61,530 |
55-64 | $256,244 | $89,716 |
65+ | $279,997 | $87,725 |
Planning for retirement might seem daunting, but understanding how much you should have saved in your 401(k) at different stages of life can significantly impact your financial security. This article will guide you through what a 401(k) is, how much you need for retirement, how much you should save monthly, and the importance of compounding growth. By the end, you'll have a clearer picture of how to ensure a comfortable retirement.
What is a 401(k)?
A 401(k) is a type of retirement savings plan offered by many employers in the United States. It allows employees to save and invest a portion of their paycheck before taxes are taken out. This means the money goes into your 401(k) account without being taxed, and it grows tax-deferred until you withdraw it in retirement. While there are other types of retirement accounts and strategies, and we recommend diversity based on individual situations, most financial plans will include a 401(k) in some way.
How to Get a 401(k):
Employer-Sponsored Plan: Most people get a 401(k) through their employer. Employers often match a portion of your contributions, essentially free money added to your retirement savings.
Self-Employed 401(k): If you're self-employed, you can set up a Solo 401(k), which allows higher contribution limits than traditional IRAs.
IRS Contribution limits to 401(k)'s rose in 2024:
Individual Contribution Limit: $23,000
Catch-Up Contribution (Age 50+): Additional $7,500
Combined Contribution Limit (Employee + Employer): $66,000 or 100% of the employee's compensation, whichever is less
401(k) vs. Other Retirement Accounts:
IRA (Individual Retirement Account): An IRA is another type of retirement account that is not employer-sponsored. It has different contribution limits and tax advantages.
Roth 401(k): Contributions to a Roth 401(k) are made with after-tax dollars, but withdrawals in retirement are tax-free.
Diversification for Tax Reasons: To manage your tax burden in retirement, it's essential to diversify your retirement savings between tax-deferred (like a 401k) and tax-free accounts (like a Roth 401k). Strategies that include multiple account types will help you balance the taxes you pay now versus what you will pay in retirement.
How Much Do You Need for Retirement?
Determining how much you need for retirement depends on several factors, including your desired lifestyle, healthcare costs, and inflation. A common rule of thumb is to aim for a retirement income that is 70-80% of your pre-retirement salary.
Factors to Consider:
Life Expectancy: Longer life expectancy increases the amount needed.
Inflation: The cost of living will increase over time.
Healthcare Costs: Healthcare expenses tend to rise with age.
Desired Lifestyle: Travel, hobbies, and other activities will impact your savings needs.
How Much Should You Be Saving for Retirement Per Month?
Many major institutions, including Fidelity, recommend that at least 15% of your gross income should go to retirement savings each year. This can be a lot for a household to handle, especially if you are saving for your children's college tuition or a down payment on a home or other major expenses.
You also need to consider that 15% may not be enough! Or, like Vanguard recommends, you vary your contribution with age:
Age Range | Average Combined Contribution Rate | Recommended Combined Contribution Rate |
Under 25 | 7% | 10-15% |
25-34 | 8% | 15% |
35-44 | 8% | 15-20% |
45-54 | 10% | 15-20% |
55-64 | 13% | 15-20% |
65+ | 16% | 15-20% |
How Much Will the Average 401(k) Balance Grow Over Time?
Understanding compounding growth is vital for appreciating the power of early and consistent saving. Compounding growth means you earn returns not just on your original investment but also on the returns that the investment has already generated.
Example:
Joe starts saving at age: 25
Joe's monthly savings contribution is: $500
Joe's advisor estimates his annual return will be about: 7%
Joe wants to retire at age: 65
Using these assumptions, the future value of the retirement savings can be calculated to show the growth over time.
When Joe retires at age 65, he will have about $1.3 million in his retirement account. Of that, only $240,000 came from Joe and the rest came from compounding growth.
Conclusion
Saving for retirement is a long-term commitment that requires careful planning and regular contributions. By understanding the basics of a 401(k), how much you need for retirement, and the power of compounding growth, you can make informed decisions that will help secure your financial future. Remember, each financial situation is unique, so it's essential to seek guidance from a financial advisor to tailor your retirement plan to your specific needs and goals.
The information presented in this blog post is intended for informational purposes only and should not be construed as financial advice or an offer to buy or sell any securities. The analysis and opinions expressed are based on publicly available data and the author's interpretation of current economic trends. However, they do not take into account your individual financial circumstances, risk tolerance, or investment objectives.
Investing involves inherent risks, and past performance is not necessarily indicative of future results. The value of your investments can go down as well as up, and you could lose some or all of your principal. Before making any investment decisions, it is crucial to consult with a qualified financial advisor who can assess your specific situation and recommend suitable investment strategies based on your risk tolerance and investment goals. Always conduct your own thorough research and due diligence before making any investment decisions.
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