Properly Planning for Retirement

Any mental health professional will tell you that comparing yourself to others isn’t good for peace of mind. However, when it comes to retirement savings, having an idea of what others do can be good information to know. It can be hard to determine how much you’ll need, exactly, for your own post-career days, but finding out how others are planning—or not—can offer a benchmark for setting goals and milestones.

Key Takeaways

  • Americans' 401(k) plan accounts 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/brokerage that administers more than $7.4 trillion in assets, the average 401(k) plan balance reached $106,000 in the second quarter of 2019—a 2% increase from $104,000 in Q2 2018.

How does that break down, more specifically? Here's how Fidelity crunches the numbers:

Twentysomethings (Age 20–29)

Average 401(k) balance: $11,800
Median 401(k) balance: $4,300
Contribution rate (% of income): 7%

Thirtysomethings (Age 30–39)

Average 401(k) balance: $42,400
Median 401(k) balance: $16,500
Contribution rate (% of income): 7.8%

Among millennials (which Fidelity defines as those born between 1981–1997), 38% of workers increased their savings in Q2 2019. This generation is the most likely to contribute to a Roth 401(k), too.

Fortysomethings (Age 40–49)

Average 401(k) balance: $102,700
Median 401(k) balance: $36,000
Contribution rate (% of income): 8.5%

The jump in the account balance size for Gen Xers could reflect the fact that these folks have logged a good decade or two in the workforce, and have been contributing to plans that long. The slightly larger contribution rate may reflect that many are in their peak earning years.

Fiftysomethings (Age 50–59)

Average 401(k) balance: $174,100
Median 401(k) balance: $60,900
Contribution rate (% of income): 10.1%

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 them to deposit several thousand more (an extra $6,000 in 2019, $6,500 in 2020) than the standard amount.

Sixtysomethings (Age 60–69)

Average 401(k) balance: $195,500
Median 401(k) balance: $62,000
Contribution rate (% of income): 11.2%

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.

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 half of your annual salary. If you are earning $50,000 by age 30, you should have $25,000 banked for retirement. By age 40, you should have twice your annual salary. By age 50, four times your salary; by age 60, six times, and by age 67, eight times. If you reach 67 years old and are earning $75,000 per year, you should have $600,000 saved.

8.8%

The average employee 401(k) contribution rate (as a percentage of salary); a record rate, according to Fidelity Investments.

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 it's a lot of money.

Not Measuring Up

If you compare these yardsticks to Fidelity's 401(k) average balance figures, it seems most people are behind in saving for retirement—even if you assume they have assets in accounts other than their 401(k)s.

A 2018 Government Accountability Office study found that nearly one-third of Americans age 55 and older don’t have any retirement nest egg or even a traditional pension plan. Those who do have retirement funds don't have enough money: 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 and every financial planning expert 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 vs. $66,000 for Gen Xers and $152,000 for baby boomers.

Similar findings come from the Economic Policy Institute: It estimates that those age 32 to 37 have saved around $31,644, but then that figure rises substantially to around $67,720 for those age 38 to 43. For those age 44 to 48, their average retirement savings are $81,349. Finally, those age 50 to 55 have saved an average of $124,831. While these may all seem like healthy amounts, all of these savings are well below even the most conservative goals.

Part of the problem, according to TransAmerica, might be a lack of financial understanding and education. Two-thirds of workers believe they don’t know as much about retirement as they should. In fact, 30% of workers say they don’t know anything about asset allocation and around 20% of workers admit to not knowing how their retirement money is invested—and that’s true of all workers, from the twentysomethings to the sixtysomethings. For that matter, only 29% of Americans aged 60 and over say they know "a great deal" about Social Security, even though nearly 90% 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.

The Bottom Line

Sad but true: 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—because any delay in deposits costs more in the long run.