Fidelity, one of the largest 401k providers, reports that the average 401k balance has reached about $120,000 as of the second quarter of 2021. For those who have been contributing to their 401k for at least ten years, the average balance is significantly higher at $251,600, marking a 12% increase from the previous year. Meanwhile, Vanguard’s data mirrors this, showing an average account balance of $120,650. For older workers, those aged 55 and above, the average climbs to $163,300.
Reflecting on the past 13 years, we see a substantial increase from the 2007 peak average of $69,000. The correlation with the Dow Jones and S&P 500 reaching record highs isn’t coincidental, considering the deep drop during the 2008 crisis when averages fell to about $50,000.
Participation rates in 401k plans are quite telling, with a 71% participation rate among those earning between $40,000 and $60,000 annually. Understandably, this rate dips to 53% for earners making $20,000 to $40,000. The participation trends upward significantly for higher earners, though exact figures are not detailed.
These statistics bring to light the critical need for robust savings habits, particularly through 401ks, to secure a comfortable retirement. Saving the maximum pre-tax contribution of $19,500 a year may seem daunting, especially for those earning under $60,000, but it’s essential. Spreading this across the year eases the burden, reducing the monthly pre-tax outlay to about $1,625, which after taxes feels more like $1,100 monthly.
Maximizing employer match programs, which often contribute up to 3% of your salary, is also crucial. Over a decade, consistent contributions can grow significantly, thanks in part to company matching and potential profit sharing, not to mention the usual returns from a balanced investment in equities and bonds.
The goal is not just to save but to accumulate a 401k that significantly contributes to your financial security in retirement. For example, starting your contributions in your early 20s can lead to having $195,000 by the time you’re 32, and potentially over $500,000 by 42, assuming a conservative growth scenario. By the time retirement rolls around at 60, having a million dollars in your 401k is a realistic target. However, it’s important to remember that $1,000,000 today will not stretch as far in the future due to inflation.
As your 401k grows, the impact of your contributions will lessen, and the returns on your investment will begin to make a more significant impact. For example, a 4% return on a $500,000 portfolio yields $20,000, illustrating how, over time, your money can start working for you, providing a steady income with minimal effort on your part. This shift towards a more passive role in managing your investments is a key strategy as you approach retirement, especially as you become more risk-averse.
Managing your 401k wisely means not just contributing but also being strategic about asset allocation and taking advantage of tools like Personal Capital, which can help analyze fees and optimize your retirement planning. The path to a substantial 401k is through consistent, informed, and proactive financial strategies, aligning your savings efforts with your long-term retirement goals.
