Retirement Investing 101: What's the Average 401k Balance?

One of the most common types of retirement account is the 401k. You may have a 401k through your employer. And if you do, you might be wondering how yours compares to other people’s retirement accounts?

The truth is that a lot of our Addition Financial members ask us,What’s the average 401k balance?

That’s a very good question to ask because the answer can help you determine if your retirement savings are on track or if you need to rethink what you’re doing to prepare for retirement. Here’s what you need to know.

What is the Average 401k Balance by Age?

The maximum 401k contribution per year as of 2018 is $18,500 with a $6,000 catch-up allowance. That means if you maximized your contributions (and worked for a company that provided matching contributions), you could have anywhere from just over half a million dollars to more than two million dollars, depending on the growth of your investments.

Of course, not everybody contributes the maximum. Here’s how the averages breakdown by age:

  • For people < 25 years old, the average is $4,154
  • For people between 25 and 34 years old, the average is $22,256
  • For people between 35 and 44 years old, the average is $61,631
  • For people between 45 and 54 years old, the average is $116,699
  • For people between 55 and 64 years old, the average is $178,963
  • For people over 65 years old, the average is $196,907

These numbers are from 2017. As you can see, the averages are significantly lower than the maximums we mentioned. The most probable reason is that people choose not to contribute the maximum.

How Much Do You Need to Retire?

Even if your current balance is in line with the national average for your age, you’ll still need to think about how much money you need to retire. As you might expect, that calculation starts with understanding how much you spend in a year. If you’re young, you will need to make some estimations of what your future expenses will be to set a savings goal.

You can start by estimating your Social Security payout. Since the Social Security Administration sends an estimate every year, you can easily figure out how much you’re likely to get if your income remains steady.

There are three simple methods you can use to calculate what you’ll need. Here they are:

  1. The 25 Times Rule. Using this rule, you’ll simply estimate your annual expenses at retirement and multiply than number by 25. This is a number that assumes you’ll live for 25 years past retirement and be able to withdraw about 4% from your retirement funds each year without running out of money. If you spend $20,000 per year, you’d need to save $500,000 using this rule.
  2. The 70% Rule. Using this calculation, you would need to figure out 70% of your income at retirement and assume you would need that amount each year for the rest of your life. Estimating your lifespan can be tricky, but here again, you may want to use 25 years.
  3. The 15% Rule. This last rule is only helpful if you are young and want to start saving for retirement now. If you save and invest 15% of your annual income between now and the age you retire, you should have enough to pay your expenses without running out of money.

Of course, if you have non-retirement goals, such as leaving money for your kids, paying college tuition for your grandchildren or making charitable bequests, you’ll need to take those into account, too.

Expert Strategies for Setting and Sticking to Your Retirement Goals

Tips to Help You Increase Your 401k Balance

What if your current 401k balance is below average or less than you think you’ll need to retire? Here are some pointers to help you boost your savings.

  1. Increase your withholding to the maximum. Remember, these are pre-tax dollars you’re saving.
  2. Take advantage of employer matching if it’s available. If it’s not, you may want to consider finding a job working for someone who will match your contributions.
  3. If you haven’t been maxing out your contributions, consider making a catch-up contribution. In 2019, you can contribute any additional $6,000 to your 401k tax-free.
  4. Take more risks with your investments. It’s a good rule of thumb that you should subtract your age from 110 to determine what percentage of your investments should be in stocks. If you’re 45 years old, you should have 65% of your portfolio in stocks.

These simple steps can help you increase your savings and ensure you’ll have enough money to retire comfortably when the time comes.

Your 401k account can be the basis for a comfortable retirement provided you manage it properly. To learn more about Addition Financial's retirement accounts, please click here now.