The Average American Has This 401(k) Balance. How Do You Compare?

You may have heard warnings about the impending "retirement crisis" -- that Americans are not doing a great job of saving for retirement. While that's certainly true, it helps to look at the data to put this statement into perspective. With that goal in mind, here's how much average Americans have in their 401(k), and how to assess your own savings progress.

The average American's 401(k) balance

The short answer is that the average American's 401(k) balance in 2015 was $96,288. This is according to Vanguard's annual How America Saves report (link opens PDF). While this study looks only at Vanguard's 401(k) accounts, with the fund company's approximately $400 billion in 401(k) assets and 3.9 million participants in plan sizes ranging from tiny to massive, it's safe to say that this study is a good cross section of American savers as a whole.

This average actually declined by 6% from a year before, due to an influx of new 401(k) plans, as well as an increase in automatic enrollment, which results in more savers with smaller contribution rates (generally, the automatic savings rate is just 2%-3% of salary).

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It's also important to look at the median 401(k) balance because it tells a completely different story. Mathematically speaking, the median marks the midpoint of a set of data, which for Americans' 401(k) accounts at Vanguard is just $26,405. In other words, half of 401(k) savers have less than this amount and half have more.

While this amount sounds a little low (and it is), there are a couple of points that need to be taken into account. First, since it's becoming more and more common for workers to change jobs every few years, the data likely includes many workers who have multiple 401(k) accounts. For example, the average 401(k) balance of someone who has been at a job for four to six years is $46,120. However, if workers in this group have two or three other 401(k)s from former employers, their savings can be significantly higher than this report makes it look.

Second, the average 401(k) balance varies widely depending on income level and age group, so I'll take an in-depth look at these categories.

Average 401(k) balance by income and age

As would be expected, the average 401(k) balance is higher for people who earn more, but it's not exactly proportional. For example, on average, people in the $75,000-$99,999 income bracket have 101% of their annual income saved, while people in the $30,000-$49,999 income bracket have just 63% of their annual earnings put away. In other words, the saving rate appears to be higher for high-income individuals.

Data source: Vanguard.

And, as you would expect, workers further into their careers have more money saved.

Data source: Vanguard.

One interesting thing I'd like to point out here: Notice that the average balance in the 25-34 age group is $22,187, which sounds pretty low. However, when you apply an annualized growth rate of 8% (below the market's historical average), this translates to more than $220,000 compounded savings in 30 years -- and that doesn't even include the effect of future 401(k) contributions. So far, it looks like the younger generation is on track to save more than the current pre-retiree (55-64) age group.

The average is not enough

The most important point I want to make here is that if you have an average 401(k) balance, or even if your account is a little above average, it doesn't necessarily mean that you're on track to be ready for retirement. And while there is no one-size-fits-all magic formula to determine how much you'll need, a good way to estimate your savings target involves these steps:

• Determine your retirement income needs. According to most experts, people will need, on average, 80% of their pre-retirement income to maintain their lifestyle post-retirement.
• Consider your other sources of income, such as Social Security and pensions. You can estimate your Social Security income by creating an account at www.ssa.gov and viewing your Social Security statement.
• Subtract your other income sources from your total income need to determine how much income will need to come from savings.
• Use the 4% rule to determine how much you'll need to save. Admittedly, this rule isn't perfect, but it is a good ballpark estimate. To apply this rule, multiply your income need from savings by 25. (Here's an article that explains this and other retirement considerations in more detail.)

Let's say you earn $75,000 and, after taking 80% of that amount and accounting for Social Security, you determine that you'll need $40,000 per year from savings. Multiplying this by 25 shows a savings target of $1 million --far beyond what the average person has in a 401(k).

The bottom line is that the average American is not saving enough for retirement. Therefore, you should strive to be better than average when it comes to taking advantage of your 401(k).

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