Monday, November 29, 2021

How does your 401(k) balance compare to the average? | The Motley Fool

There’s a reason why working Americans are often warned not to rely too heavily on Social Security for retirement. Those benefits will only replace about 40% of the average earner’s pre-retirement salary, and most seniors need about 70% to 80% of their pre-retirement income to maintain a decent lifestyle. Also, because Social Security deductions may be on the table, saving independently for retirement is even more important.

If you have access to a 401(k) plan through your employer, you have a prime opportunity to accumulate some decent cash reserves for your senior years. Currently, annual 401(k) plan contributions are maximum $19,500 for workers under age 50 and $26,000 for people age 50 and older. And since many employers offer matching incentives, it’s possible to sneak even more money into a 401(k) plan (to be clear, employer contributions don’t count toward the above limits).

If you’re saving for retirement in a 401(k), you may be wondering how your balance compares to the average American. And vanguard can be your answer.

Image Source: Getty Images.

How does your 401(k) balance stack up?

As of Vanguard’s 2021, in 2020, the average 401(k) balance for Vanguard participants was $129,157. How America Saves report good. However, the mean balance was significantly lower, coming in at $33,472.

Whenever you have a median that is significantly lower than the mean, you can infer that more people have less than the mean. Or, to put it another way, the average $129,157 balance could come as a result of a small percentage of 401(k) participants who have saved very well and are dragging the average upward. But that $33,472 may reflect more than what the typical saver has actually done to date.

How Much Retirement Savings Should You Have?

There is no magic savings number that will guarantee you financial security in retirement. A good rule of thumb is to stash enough cash so that by the time you leave the workforce for good, you’ll have 10 to 12 times your last salary in savings.

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But remember, this is the overall goal you should aim for at the time of retirement. And so if you’re 30 and sitting on a retirement plan balance of $33,472, or something in the vicinity, you may not be in such bad shape.

On the other hand, if you earn a salary of $80,000 per year and you’re already in your 50s, $33,472 becomes problematic if it reflects your balance. In that case, you may actually consider making major lifestyle changes that allow you to put more money into your retirement planning. These may include reducing the size of your home, spending very little on comfort, and taking on another job.

Does the Average 401(k) Balance Matter to You?

Not necessary. Knowing how much Americans have saved may satisfy your curiosity, but remember, the amount of money you’ll need for retirement will depend on the income you’re living on and your savings for your senior years. Have goals.

In fact, the rule of starting retirement with 10 to 12 times your ending salary may not apply to you if you normally live very frugally and don’t spend a lot of your income. For example, if you make $80,000 a year, but mostly manage to live on $40,000 a year, you may not need a nest egg of $800,000 to $960,000.

Ultimately, knowing what the typical American has in store for retirement shouldn’t change your savings strategy. But if you’re well into your career and have saved much less than the average person, that alone may be what motivates you to move on. And that’s not a bad thing at all.

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