When planning for retirement, many Americans rely on their 401(k) savings as a key component of their financial strategy. However, recent data suggests that the median 401(k) balance is much lower than many people might expect. According to a report from Vanguard titled “How America Saves 2023,” the average 401(k) balance varies significantly by age group.
According to Vanguard’s data, here are the average and median balances:
Age Average Account Balance Median Account Balance
Under 25 $5,236 $1,948
25-34 $30,017 $11,357
35-44 $76,354 $28,318
45-54 $142,069 $48,301
55-64 $207,874 $71,168
65+ $232,710 $70,620
Why the gap between the average and median balances? It reflects the savings habits of high earners who might save closer to the $23,000 annual limit for 2024 as well as the very low or zero balances of other participants.
Both the average and median balances fall well short of a common $2 million retirement nest egg. Following the 4% withdrawal guidelines, a $2 million balance would mean someone could take out $80,000 per year without negatively impacting the principal. It’s an amount that takes into consideration rising healthcare costs in retirement and staying close to a preretirement lifestyle.
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Auto-Enrollment Helping
Despite the benefits of a 401(k) plan and the immediate returns of “free money” from company matches, not all eligible employees participate in the plans. However, according to Vanguard’s data, auto-enrollment is the core reason for rising historical 401(k) participation rates. Since the enactment of the Pension Protection Act in 2006, the use of automatic enrollment has more than tripled. Presently, nearly 58% of plans and 76% of plans with at least 1,000 participants have implemented this feature. By bypassing the inertia and procrastination that often deter voluntary enrollment, automatic enrollment has removed a significant barrier to entry for retirement plans.
Participation rates vary by age, with Vanguard noting the lowest rates for employees under 25, who are often saddled with student loan payments and the reality of housing costs. The study found only 62% of this younger group contributed to their employer’s plan, while more than 80% of the 35 to 64-year-old group contributed.
Trending: Can you guess how many Americans successfully retire with $1,000,000 saved? The percentage may shock you.
Moving Your Balance Past The Median
A 401(k) plan offers numerous benefits for retirement savings, including tax-advantaged ways to save, as contributions are typically made with pretax dollars, which means you reduce your taxable income. The funds in a 401(k) grow tax-deferred, allowing your investments to compound over time without being taxed annually. All 401(k) plans are portable, meaning you can roll them over to a new employer’s plan or an individual retirement account (IRA) if you change jobs.
Get the most out of your retirement savings with a 401(k) by following some tips:
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Contribute the maximum allowed amount each year.
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Take advantage of employer matching contributions up to the maximum amount. For example, if an employer offers a 100% match up to 6%, that means if you contribute less than 6% of your pay you’re giving up some 100% returns.
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Consider catch-up contributions if you are 50 or older. You can contribute up to $7,500 more per year for a $30,500 annual limit if you’re over 50.
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Review and adjust your contributions regularly. Consider bumping them up when you get a raise and elect to have contributions pulled from any annual bonuses.
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Talk to a financial adviser to create a retirement plan.
Several obstacles dampen workers’ ability to save. Rising inflation means more money goes toward food and other essentials. High college costs create student loan debt for younger people and their parents, which can limit investing. Job insecurity is another concern, with workers worried about layoffs and the resulting financial impacts. Despite these obstacles, you can get ahead of the average savings balances by starting early, understanding investment risk and steadily increasing contributions to let loose the power of compound investing.
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*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.
Aran Richardson is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Richardson believes the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.
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