Median 401 Retirement Balance By Age Discrepancies Explained
Ive been consulting with more clients about their personal finances and what Ive discovered is that something always seems to come up and knock someone off their retirement savings path.
Its all fine and dandy to assume everyone should logically max out their 401 or at least save 20% of their after tax income until retirement, but this is seldom the case.
With consent from my clients, let me share several case studies on retirement balances to illustrate some points. Ill also highlight one readers e-mail feedback about the topic as well as my own example. Names are changed for privacy reasons.
What Is The Average Hsa Balance By Age
The average HSA balance for a family is about $7,500 and for individuals it is about $4,300. This average jumps up to $12,000 for families who invest in HSAs. Heres a breakdown of the average HSA balance by age.
|Average HSA Balance By Age|
How Much Should I Contribute to My HSA?
When deciding how much you should contribute to an HSA, there are a few things to consider. First, HSA contribution limits increased by $50 in 2022 for self-only coverage, from $3,600 to $3,650. Folks with family plans can contribute up to $7,300 in 2022, which is $100 up from 2021. If youre 55 or older, you can contribute an extra $1,000 into your HSA account.
Maxing out an HSA helps you leverage the numerous tax advantages that come with the account. HSA contributions are tax deductible, which means they are subtracted from your taxable income. Also, as the account holder you can invest the money in the account, and it can earn tax-free interest. Plus, if you take a distribution after age 65, you wont have to pay taxes on the total amount withdrawn.
If maxing out your HSA is not in the cards for you, you can select a different amount. Some employers may match your HSA contributions or contribute individually. If your employer contributes to your account, its essentially free money you can use toward qualifying medical expenses within the year or savings for future medical costs. You can use the money for items like Band-Aids, glasses, contact lenses or visits to the doctor.
Retirement Vs Emergencywhich Comes First
Experts advise that you should put away at least three months’ worth of living expenses before you begin saving for retirement. Six months’ worth is even better. Tally up what you spend on rent or mortgage payments, utilities, transportation, insurance premiums, uninsured health care costs, food, and debt service. Then, multiply that number by three to six, depending on your goals.
Set this money aside so it will be there for you in the event that something catastrophic occurs that prevents you from earning income for an extended period of time. Consider keeping your funds in an easily accessible, interest-bearing account, like a high-yield savings account or money market account.
Knowing how much you’ll need for retirement is something of an educated guess, particularly when you’re younger, because you can’t yet know how long you’ll be living off your savings.
You must also forecast your financial needs, estimating what your budget will be, years in the future.
Experts recommend having at least one year’s current salary saved by your thirties.
Experts recommend having three times your current annual salary saved in your forties.
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Savings Potential By Age
Suppose an investor maxes out their 401 contribution of $20,500 annually beginning at age 25. Also, assume that the 401 has an average rate of return of 9.5%. By the age of 65, the investor will have contributed a total of $840,500 of their own money into their 401, but because of compounding returns, it could result in a 401 savings potential of nearly $9 million.
However, these figures are just hypotheticals to show the power of compounding returns in a 401 account. This does not account for fees, changes in contribution limits, a possible 401 employer match, or fluctuations in the market. Nonetheless, by contributing to a 401 early and often, investors may be able to build up a substantial retirement nest egg.
Hypothetical 401 Balance by Age, Assuming 9.5% Annual Rate of Return
How Much Could Your 401 Grow
The earlier you start investing in your 401, the easier it is to build a hefty balance thanks to compound earnings.
When you invest money, your investments earn money for you. This can be reinvested so you then have a larger pool of assets earning returns. Your money can grow exponentially. That’s why Albert Einstein was famously quoted as describing compound interest as the “eighth wonder of the world.”
The chart below shows how much $1,000 invested in your 401 could turn into by age 67, depending on when you make your $1,000 investment and assuming an 8% average annual rate of return.Table by author.
Higher earners need more money saved for retirement because, in most cases, they are used to a higher standard of living. They will need their retirement investment accounts to produce sufficient funds to maintain their lifestyle after their paychecks stop.
Many workers contribute a set percentage of income to their 401, such as 10%. With this percentage-based approach, higher earners inevitably invest more for retirement each year than their lower-earning counterparts.
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Average And Median 401 Balance By Age
These are the average and median balances for specific age groups at the end of 2020, according to Vanguard, which gathered data from 4.7 million defined contribution plan participants across its recordkeeping business.
- Average 401 balance: $6,718
- Median 401 balance: $2,240
The median balance for people just getting started in their careers is $2,240. That means half of 401 plan participants in this age group have less than that amount saved and half have more. Thats a start and offers plenty to build on. The average balance is quite a bit higher, skewed by those who are able to save more in their 401.
How much should you strive to save for retirement? Fidelity, which manages employee benefits programs for more than 22,000 businesses and offers a variety of financial planning services, suggests saving at least 10 times your annual salary by age 67. The firm also advocates following another metric: Save 15 percent of your pretax income from the time you begin your career including any company match. So, if your employer matches 3 percent of your salary, youd need to save 12 percent. If current expenses preclude this possibility, work toward that amount as a goal.
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 goals. Your savings objectives will be different if you plan to retire at 50 than if you plan to continue working past 70. Additionally, its important to determine as accurately as you can what your cost of living will be in retirement. How much do you need to spend per year to maintain the lifestyle that you want for the rest of your life? Have a good sense of what your costs will be so you can factor that into your overall retirement strategy. Really evaluate how long you want to continue working, and what retirement age is realistic for you based on your income and your current level of savings.
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Are You Eligible For A Hostplus Retirement Account
There are two types of Hostplus retirement accounts: Hostplus Pension and Hostplus Transition to Retirement. With your choice of investment and income payment options, youre in control of your retirement lifestyle with a Hostplus retirement account. But youll need to meet the following requirements to be eligible.
Average 401 Plan Balances By Age
According to Fidelity Investments, the financial services firm that administers more than $11.8 trillion in assets and has 34.7 million workplace participant accounts, the average 401 plan balance decreased to $121,700 in the first quarter of 2022.
However, the savings rate contributions), was about 14%. This percentage almost met Fidelity’s suggested savings rate of 15%.
How does workplace plan saving break down by age? Here’s how Fidelity crunches the numbers.
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Join 50,000+ others and subscribe to my free weekly newsletter. Since 2009, the newsletter has helped people achieve financial freedom sooner, rather than later.
Also pick up my Wall Street Journal bestseller, Buy This, Not That, if you want an unfair competitive advantage to building wealth. Why The Median 401 Retirement Balance Is So Low is a FS original post.
How Much To Save For Retirement
Naturally, the next question becomes: how much should a person save for retirement? Simply put, it’s an extremely loaded question with very few definite answers. Similar to the answer to the question of whether to retire or not, it will depend on each person, and factors such as how much income will be needed, entitlement for Social Security retirement benefits, health and life expectancy, personal preferences regarding inheritances, and many other things.
Below are some general guidelines.
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Is There A Magic Retirement Number
So how much should you have by the time youre 60?
Retirement calculators like this one can help you get some answers. But the best thing Americans can do is head to a financial adviser who can help them reach their goals.
If youd like a broader approach, Fidelity has ways to pinpoint the right numbers for you. Broadly speaking, Americans should aim for the equivalent of their salary by age 30, three times by 40, six times by 50, and eight times by 60.
So if youre a 60-year-old American and make $50,000 per year, that means you should have $400,000 saved in your retirement account. As you can see, neither the average nor the median retirement amount comes even close.
That said, the should amount doesnt account for a host of variables. Consider for example how much youll be able to cut expenses in retirement, the money you may take in through Social Security, assets you can unload or the sale of a home.
Calculating Your Target Savings
Retirement looks different for everyone. But assuming you’ll maintain the same lifestyle in retirement that you currently enjoy, you can calculate how much you should have saved by now using your annual income and an appropriate multiplier based on your age, which you can find in the following table.
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The Benchmarks For Those Closer To Retirement
The range gets wider as you get older, so we also provide more detailed estimates for people approaching retirement. This helps someone find a realistic target based on income and marital status, which affect Social Security benefits.
A Closer Look at Savings Benchmarks Later in Your CareerSavings Benchmarks Later in Your Career
Assumptions: See Savings Benchmarks by AgeAs a Multiple of Income above. Dual income means that one spouse generates 75% of the income that the other spouse earns.
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Americans Are At Risk Of Falling Short In Retirement
The Center for Retirement Research at Boston College calculates the National Retirement Risk Index. Its updated every three years, relying, in part on the same Federal Reserve data that EPI uses. According to those numbers, 50% of households were at risk of not being able to maintain their pre-retirement income through retirement. Thats a marked increase from the 30% that the Boston College analysts calculated for 1989.5
People in retirement rely on a number of : earned income , Social Security, pensions, investment income, and retirement savings. Many of them also receive other sources of income including disability benefits, veterans benefits, and support from relatives.
Average Savings By Age 40
Individuals in their 40s have probably paid off student debt but are still working their way through mortgages and the expenses that come with a family, ranging from daycare to college tuitions. But the good news is that theyre also in the prime of their career, having worked their way up the ladder over the past two decades. When considering average savings by age 40, data shows you should have at least $17,799 to $35,599 in savings and $185,811 in retirement savings.2
If you are behind on your savings, dont worry. You can still catch up and reach your retirement goals. Paying off your debt and funding your 401 at the maximum amount is a great start. Consider maximizing your savings through tax advantages that come with an IRA if your employer doesnt offer a 401, or in addition to your 401.3
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How Much Should I Save For Retirement
The bottom-line goal of retirement planning is deceptively simple: accumulating enough money to live the life you want once your career is no longer occupying most of your time or generating a regular paycheck.
Achieving that goal requires asking questions that have no easy answers: How much money will you need? How can you measure your progress toward a target decades in the future?
A financial advisor can help you with those questions, then tailor a financial strategy to help you meet your individual goals.
Often, people trying to figure out how well theyre doing begin by comparing their own savings with those of others in the same age bracket. If youre curious how you stack up, data collected by the Federal Reserve in its 2019 Survey of Consumer Finances, shown below, can tell you. What those numbers cant do, though, is tell you how close you are to your goal.
Using them as a gauge is a little like comparing your SAT score with the average of your graduating class in high school to determine whether its high enough to get you into a particular university.
The one piece of data thats crucial is the average SAT score of the freshmen the university admitted. Without that data point, you have no idea whether your score meets the institutions standards.
Retirement Savings When You’re In Your 20s
Suggested savings: A common recommendation at this age is to have the equivalent of your annual salary saved by the time you’re about to turn 30. The median income of someone in their early-20s is approximately $33,000. Aim to have that amount in retirement savings by the end of your 20s.
Average savings: According to U.S. News & World Report, those under 25 have an average of $5,419 in their 401s, while those 25-34 have an average of $26,839.
In your 20s, you’re just starting your career and your fully independent adult life. You have decades until retirement, which means you have time to learn about personal finance, save for retirement and pay off debt. In particular, reducing student loan debt is a common goal for people in this age group, as carrying significant debt can impact the ability to save down the road.
At this stage of life, having anything saved is better than nothing. Build your budget and stick to it.
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See How Your Savings Stack Up
Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.
Creating Or Reassessing Your Retirement Goals
If youre still working on putting your retirement savings plan together, a 401 can be a good place to start. As you decide how much to save, ask yourself these questions:
What kind of lifestyle do I want to live in retirement?
When do I plan to retire?
How much of my income can I afford to save in a 401?
Is there an employer match available, and if so, how much?
How much risk am I willing to take with 401 investments?
A retirement calculator can help you estimate how much you might need to save for retirement. Some calculators can factor in how much youve already saved to tell you if youre on track with your goals.
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It can be helpful to check in with your goals periodically to see how youre doing. For example, you might plan an annual 401 checkup at years end to review how your investments have performed, what you contributed to the plan, and how much youve paid in fees. This can help you make smarter investment decisions for the upcoming year.
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