It's important to make sure that your retirement plan is staying on track; otherwise, you won't be financially self-sufficient by your planned retirement age. Comparing your 401(k) balance to the average person in your age group is one way to measure your progress. Keep in mind that the average person's plan might not necessarily reflect your individual needs and goals.
Also, recognize that a 401(k) is only a portion of most people's retirement resources, so your account balance doesn't capture all of the data. Still, comparing yourself to peers is a good way to determine if you need to adjust your current strategy.
What does the latest data tell us?
The average balance in a 401(k) account for individuals between the ages of 55 and 64 is $207,874. However, this number is skewed by larger accounts. The median balance is only $71,168 for
people in that age group, so most households fall well short of the mean. Roughly three-quarters of households are below that $200,000 threshold.
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Also consider that many people have retirement savings outside of their 401(k). Households often supplement employer-sponsored plans with an IRA or brokerage account. They may also have different retirement accounts from previous employers, such as defined benefit pensions or a 403(b). The average total retirement savings balance is around $540,000 among 55- to 64-year-olds. It's fair to assume that the median value is much lower than the mean in this case, as well.
Why is this figure so important?
The 55-64 age range is noteworthy because it often represents the last stage of financial planning before retirement. Numerous factors influence the timing of your retirement, but financial preparedness is essential. Without building enough savings to retire comfortably, you won't be able to stop working. There's less time to correct course as you approach your mid-60s, so you need to understand your savings goals for that age range.
The 401(k) is a popular wealth building tool, but it's just one piece of the puzzle. The average plan participant contributes 4% to 5% of their annual income, including employer contributions. That's a fair bit below the 15% savings rate that's recommended by financial planners, even if it's a significant portion of your plan.
The $71,000 median 401(k) balance isn't sufficient to support most households' retirement needs. Even if we assume that the average retired household has a total of $200,000 in retirement savings, that would only produce $8,000 of income each year without incurring the risk of exhausting your savings too early, according to the 4% rule. That's also before any taxation on account distributions. The average Social Security benefit adds another $22,300 per year. That guaranteed income is helpful, but it's probably not enough without additional retirement savings.
We can draw a few important conclusions from this information. First, most people between ages 55 and 64 lack the financial means to retire comfortably. Many people in their mid- to late 50s expect to work another decade, so this might not surprise them.
These can be great years for wealth creation. Compounding returns can yield more asset growth than in previous years. Catch-up provisions allow people to contribute extra dollars to their 401(k) or IRA. Some people find it easy to attain a high savings rate once their kids move out and their mortgage is paid off, which aren't common conditions for younger families. The opportunity for savings acceleration is there for pre-retirees, but it still requires discipline and favorable circumstances.
What does this mean for your retirement plan?
The data indicates that many households might struggle to make ends meet in retirement. Many more need to implement meaningful changes to maintain their lifestyle once they stop working. More Americans are electing to delay retirement, and this trend is likely to accelerate.
Keep these numbers in mind as you manage your financial plan. If you're ahead of the curve, then congratulate yourself and continue executing a successful plan. If you're among the many Americans who are falling behind, then don't panic. Assess your situation, identify strategies to increase savings, measure your progress toward your goals, and set realistic expectations for your retirement age and budget.
