Americans 401k balances will make you sad

Americans 401k balances will make you sad

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401k plans are continually growing in popularity. Today, more and more employers are offering the plan, which has become a staple of the retirement system of the future in the United States. That doesn’t mean the balances are booming. In fact, they’re rather pathetic.

How much Americans have in 401k plans

Per Vanguard’s ‘How America Saves 2022‘ report, the average 401k contribution at the firm is $141k while the median contribution is $35k. In this case, the median is more important than the average because it eliminates the outliers. For example, if Jeff Bezos walks into a room, the average net worth in that room is now billions of dollars, even though it’s carried by one individual. In this case, that $141k average is carried by dedicated savers.

Back to the point – if you think $35k is going to get you through retirement – you’re sadly mistaken. According to NerdWallet, a common rule is to have 70% of your pre-retirement income in annual retirement income. That means if you have $35k, you can withdraw $1,225 per year, or 3.5%. So unless your final income was $1,750 per year, you’re in trouble.

Clearly I’m ignoring potential Social Security payments, part time work, and other means of income in retirement. But seriously, would you feel safe with $35k for the rest of your life. The answer should clearly be no. But for some reason, most people are still under-saving for their golden years.

Some positive news

While everything you’ve read so far may seem gloomy, there is hope! According to the same report, 83% of individuals that were qualified for withdrawals (59.5 years of age), did not take a withdrawal in their first year of retirement. This means they let their money continue to grow while surviving on other income. Great choice!

Additionally, only 8% of participants actively exchanged funds, meaning that most picked an asset allocation that met their risk tolerance and stuck to the plan. This is a great method for continued gains.

How to avoid being a statistic

Clearly you don’t want to be one of the people with $35k in a retirement account. If this is true, you have a few options that can help bolster your nest egg.

If you receive a 5% pay raise, you should increase your 401(k) contribution by 5%. If you make $50,000 per year, this would be a $2,500 increase annually. Over a period of 30 years, this will make a huge difference in your retirement planning. Continue this process until the IRS limit is reached.

D.C. Poc, Wealthy Idiots

Employers are taking action also. By adding automatic enrollment for their 401k plans, they increase the likelihood of saving. Sometimes, a good starting point is all someone needs.

The biggest tip we can offer – start paying yourself FIRST. Make sure you think about your future self and protect them. Don’t screw up your own future.

Author

  • D.C. joined the Marine Corps right out of high school. When he left active duty after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time), he quickly realized he needed to learn how to save for his future. After nearly ten years of research and application, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!