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Today we're going to look at the average 401k balance by age group according to Vanguard's most recent report titled "How America Saves." This report is a 115-page deep dive on 401k statistics, including the average contribution rate, employer matches, and who is participating.
Now I think that there's some really interesting numbers in this report beyond the average balances, so I'm going to give you those numbers as well so you can see where you stack up. And stick around to the end because there's one really fascinating statistic from this report that you don't want to miss.
With most of these numbers, Vanguard gives the average and the median. If it's been a few decades since you last took statistics, don't worry because we're going to review the difference.
Both the average and the median are ways to tell us the middle of a group of numbers.
The average of the group is found by adding up all the numbers, then dividing by how many numbers there are. So if we have seven different 401k balances, we would find the average by adding all these numbers together, then dividing by seven. So the average of this particular group is $65,714.
The median, on the other hand, is the number that's in the middle if you line up all the numbers from least to greatest. So the median in these 401k balances is $40,000.
The average can be a lot different than the median because it's impacted by outliers, or unusually large or small numbers. If we changed one of our 401k balances to a multi-million dollar balance, the average is going to be significantly impacted, but the median doesn't change at all.
So in the numbers from Vanguard, specifically the 401k balances, you're going to see that the averages are much higher than the median for this reason. With that out of the way, let's get into the data.
So we're going to start with the average 401k balance by age group, and I'll throw that on the screen now.
Are these numbers good or bad? How much should you have saved? Well, it's important to note that these numbers represent the average 401k balance for participants in Vanguard 401k plans. It's not the total balance for all their retirement accounts or even all of our participants' 401ks.
A lot of people have old 401ks that they don't combine with their current 401k, or they roll those old 401ks into an IRA, and those assets aren't going to be captured in this report.
If you want to have a rough idea of how much yearly spending your retirement savings can support, you can take your balance multiplied by 4%. This is known as the 4% rule, and while there are all kinds of problems with the 4% rule, it can point us in the right direction.
So for the median 401k balance in the age 55 to 64 cohort of $71,168, we can multiply that by 4% and we get $2,850 roughly. That means that retirement savings of $71,168 may be able to support $2,850 of yearly expenses in retirement or $238 per month.
Now that would be on top of whatever fixed income sources are coming in, like a pension or social security, but it doesn't take a financial advisor to know that that's not very much.
So if this number was representative of the median 55 to 64 year old American's total retirement savings, we'd have a problem. But other studies show that's not the case.
How much are people contributing to their 401ks by age?
To be honest, I'm pleasantly surprised by these numbers. It's higher than I thought it would be.
Not surprisingly though, the average contribution rate goes up with age. As people are making higher incomes and getting closer to retirement, they're contributing more.
This is only the employee contributions, but many people also get a contribution from their employer. In fact, Vanguard found that 98% of participants were in a plan that offered some kind of employer contribution and 85% of those plans offered a match of at least 3%. And that could add up to a significant amount over the course of a working career.
So everybody is taking advantage of that free money from their employer, right? No. 31% of 401k participants aren't contributing enough to get their full employer match. And this hurts because an employer match in most cases is the absolute best return you can get on your money.
Let's say your employer matches 100% of your first 3% in contributions. That means you are immediately doubling your money on that first 3%. Even a 50% match is a massive return.
I know there are a lot of people that are just trying to get by and putting more money in a 401k seems out of reach, but it really can make a big difference. And as we'll see later in this report, I think there is room for just about everybody to get a little bit into their 401k.
For most people, getting the full 401k match is the number one priority before moving on to anything else.
How much should you be contributing? Of course, it's going to be different for everyone, but Vanguard estimates that a typical participant should aim for a total contribution rate of 12-15%, including both the employee and the employer's contributions.
They found that the median total contribution rate was 10.6%. So actually not that far off. And 48% of participants had contribution rates that either met that 12% threshold or hit the maximum contribution in 2022.
In 2022, which is the year this data came from, the maximum an employee under the age of 50 could contribute to their 401k was $20,500. 15% of participants in Vanguard's study hit that $20,500 number. And not surprisingly, those who hit the max, "tended to have higher incomes, were older, had longer tenures with their current employer, and had accumulated substantially higher account balances."
This is all really interesting for people like myself who like data, but now I'm going to talk about what I thought was the most interesting finding from this study.
Let's look at participation rates by income.
This is showing us how many people who are eligible to contribute to their 401k plans actually do. And the trend is clear. As income goes higher, more people in that income range contribute to their 401k. Shocker, right?
But here's what's really surprising. A lot of plans offer automatic enrollment, 58% of plans in Vanguard's study, which means that once an employee becomes eligible for their 401k plan, their employer automatically enrolls them with some contribution.
If the employee doesn't want to contribute to their 401k, they have to opt-out. Compare this to voluntary enrollment, where the employee has to actively choose to start contributing once they're eligible.
Now let's look at those participation rates by income again, but this time I'm going to add another layer of plans with automatic enrollment versus plans with voluntary enrollment.
Wow! Look at the lowest two income segments in particular. Less than $15,000 in income has 28% participation with voluntary enrollment, but 80% participation if they're just automatically enrolled!
This tells me that there are a lot of people that could be contributing to their 401k, but aren't either because of inertia or it feels overwhelming or something.
There is a huge opportunity for employers here to adopt automatic enrollment in order to improve the financial health of their employees.
There's one more fascinating statistic from this report I want to talk about, and that's how people are contributing, either pre-tax or Roth.
80% of plans in Vanguard's study had a Roth option, so most people are given the choice of making pre-tax contributions or Roth contributions.
Only 17% of participants are making Roth contributions according to Vanguard, and when we break it out by income, this is really surprising to me because it's the opposite of what it should be. A larger portion of high-income employees are making Roth contributions, while the vast majority of low-income employees are making pre-tax contributions.
I have a whole video talking about how to know whether you should make pre-tax or Roth contributions, so if you haven't seen that yet, watch that next.
I find that a lot of people are either winging it in this decision, or they've been told something that just isn't true. And making the wrong election here could cost hundreds of thousands of dollars over a lifetime, so it's an important one.
These are the kinds of decisions that I help clients with on a regular basis, so if you have questions about your situation specifically, and you think you could benefit from a financial plan (and let's be honest, who couldn't?) then I encourage you to reach out. We help our clients create a comprehensive plan on everything from savings, to debt, to cash flow, and insurance, estate planning, investments, and the list goes on and on. Schedule a free consultation to see how we can help.
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