Properly Planning for Retirement
Any mental health professional will tell you that comparing yourself to others isn't good for your peace of mind. However, when it comes to retirement savings, having an idea of what others do can be good information.
It can be hard to determine exactly how much you'll need for your own post-career days, but finding out how others are planning—or not—can offer a benchmark for setting goals and milestones.
- Americans' 401(k) balances are up, thanks to a combination of asset performance and increased contributions.
- 401(k) account balances and contribution rates vary greatly by age, with those in their 60s racking up the biggest numbers.
- Most Americans still aren't saving sufficient amounts for their retirement years, several studies show.
401(k) Plan Balances by Generation
The good news is that Americans have been making an effort to save more. According to Fidelity Investments, the financial services firm that administers more than $7.3 trillion in assets, the average 401(k) plan balance reached $112,300 in the fourth quarter of 2019. That's a 7% increase from $95,600 in Q4 2019. It's worth noting that the Q1 2020 amounts will likely be different based on the economic volatility caused by the global pandemic.
How does that break down by age? Here's how Fidelity crunches the numbers:
Twentysomethings (Age 20–29)
- Average 401(k) balance: $10,500
- Contribution rate (% of income): 7%
Thirtysomethings (Age 30–39)
- Average 401(k) balance: $38,400
- Contribution rate (% of income): 8%
Among millennials (which Fidelity defines as those born between 1981–1997), IRA contributions increased by 21% compared to Q4 2018. This generation contributed approximately $373 million to IRAs, 46% more than in the previous fourth-quarter. Roth IRAs accounted for 73% of millennial contributions.
Fortysomethings (Age 40–49)
- Average 401(k) balance: $93,400
- Contribution rate (% of income): 8%
The jump in the account balance size for Gen Xers could reflect the fact that these folks have logged a good couple of decades in the workforce, and have been contributing to plans that long. The slightly larger contribution rate may reflect the fact that many are in their peak earning years.
Fiftysomethings (Age 50–59)
- Average 401(k) balance: $160,000
- Contribution rate (% of income): 10%
The jump in the contribution rate for this group suggests that many are taking advantage of the catch-up provision for 401(k)s, which allows people age 50 and over to deposit more (an extra $6,000 in 2019 and $6,500 in 2020) than the standard amount.
Sixtysomethings (Age 60–69)
- Average 401(k) balance: $182,100
- Contribution rate (% of income): 11%
Savings-wise, it's now or never for this group. The fact that the contribution rate is as high as it is suggests that many baby boomers are continuing to work during this decade of their lives.
Seventysomethings (Age 70–79)
- Average 401(k) balance: $171,400
- Contribution rate (% of income): 12%
As of Jan. 2020, the Further Consolidated Appropriations Act removed the age limit that made it impossible for individuals 70½ or older to make contributions to traditional IRAs. This opened up an additional retirement savings option for those currently working or running their own business.
Of course, we're living in a vastly different world in 2020 than we were in 2019. How each generation's ability to save for retirement will be affected by the financial impacts of the COVID-19 pandemic is uncertain.
Retirement Savings Goals
What should you aim for, savings-wise? Fidelity has some pretty concrete ideas. By the time you’re 30, the company calculates you should have saved an amount equal to your annual salary.
If you are earning $50,000 by age 30, you should have $50,000 banked for retirement. By age 40, you should have three times your annual salary. By age 50, six times your salary; by age 60, eight times; and by age 67, 10 times. If you reach 67 years old and are earning $75,000 per year, you should have $750,000 saved.
The average employee 401(k) contribution rate (as a percentage of salary).
There’s also the tried-and-true, what some might call old-school, 80% rule: Save as much as you would need to have the equivalent 80% of your salary for about 20 years.
That would require about $1.2 million for that same person making $75,000 if you don’t factor inflation into the mix. That number goes up to between $1.5 million and $1.8 million depending on how you do try to factor it in.
However you choose to calculate it, everyone agrees that's a lot of money.
If you compare these yardsticks to Fidelity's 401(k) average balance figures, it appears that most Americans are behind in saving for retirement—even if they have assets in accounts other than their 401(k)s.
A 2019 Government Accountability Office study found that nearly 48% of Americans age 55 and older don’t have any retirement nest egg or a traditional pension plan.
Those who do have retirement funds don't have enough money in them: 56- to 61-year-olds have an average of $163,577, and those 65 to 74 have even less in savings. If that money were turned into a lifetime annuity, it would only amount to a few hundred dollars a month. Any financial planner would agree that it’s not nearly enough.
In its 19th annual survey, the Transamerica Center for Retirement Studies found that millennials had median retirement savings of approximately $23,000, compared to $64,000 for Gen Xers and $144,000 for baby boomers.
Similar findings come from the Economic Policy Institute: It estimates that those aged 32 to 37 have saved around $31,644, but that figure rises substantially to around $67,720 for those aged 38 to 43. For those aged 44 to 49, average retirement savings are $81,347. Finally, those aged 50 to 55 have saved an average of $124,831. While these may seem like healthy amounts, all of these numbers are well below even the most conservative goals.
Part of the problem, according to TransAmerica, might be a lack of financial understanding and education. Sixty-eight percent of workers believe they don’t know as much about retirement as they should. In fact, 37% of workers say they don’t know anything about asset allocation and around 22% admits to not knowing how their retirement money is invested.
For that matter, only 20% of Americans say they know "a great deal" about Social Security, even though nearly 74% expect it to be a significant source of income when they stop working.
The Social Security Administration states that its retirement benefits are designed to replace only about 40% of the average worker's wages.
How to Turn It Around
The sad but true part is that most Americans don’t have nearly enough savings to sustain them through retirement.
How do you avoid that fate? First, become a student of the retirement savings process. Learn how Social Security and Medicare work, and what you might expect from them in terms of savings and benefits.
Then, figure out how much you think you'll need to live comfortably after your nine-to-five days are past. Based on that, arrive at a savings goal and develop a plan to get to the sum you need by the time you need it.
Start as early as possible. Retirement may seem a long way away, but when it comes to saving for it, the days dwindle down to a precious few, and any delay costs more in the long run.