How do your retirement plan savings stack up? Are you accumulating retirement assets faster than your peers?
Every three years I look forward to the latest Federal Reserve Board’s Survey of Consumer Finances (SCF) to remind us how wealth is distributed in the United States.
Also see the other postings in our Financial Voyeurism series:
- Part 1 – Exploring Household Income
- Part 2 – Net Worth by Age
- Part 3 – Household Net Worth
- Part 4 – Net Worth Growth
Retirement Plan Savings
Today we look at the average value of people’s tax-advantaged retirement accounts (IRA, 401(k), thrift savings account, pensions, etc.) across the country.
The chart below shows how much others are socking away for retirement. And the change in value since 2016 and 2019.
But there is an important caveat. Only 54% of households even have a retirement account (up from 51% three years ago).
And this data only captures the 54% of families that have a retirement account. Meaning 46% of households have no retirement savings in a tax-advantaged account.
Furthermore, the mean account values presented in the Fed’s SCF only include “working families”.
Which, for this study, the Federal Reserve used those age 35 to 64. Among this subset of households, almost 70% had a retirement plan in 2022.
Mean Retirement Savings* (2016–22 surveys) – Thousands of 2022 dollars
*Only includes households that have at least one IRA or DC retirement account
Sources: Federal Reserve, 2022 Survey of Consumer Finances.
Road to Retirement
Wondering if you are on the right path to a comfortable retirement? Is your retirement plan savings enough relative to your expected retirement expenses?
Check out a couple of other articles that address these questions and target savings goals.
Roadmap to Retirement: Fire or FRA
How Much Wealth Should You Have by Age 45?
Full report on the Fed’s Survey of Consumer Finances
Average 401(k) Account Balance:
The average 401(k) account balance varied widely based on the source and the demographic considered. But here are some general observations:
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- Across All Ages: According to data from Fidelity Investments, one of the largest retirement plan administrators, the average 401(k) balance across all age groups was around $121,500 in the first quarter of 2021.
- By Age Group: The average balance can differ significantly when broken down by age. For instance, Fidelity reported the following average 401(k) balances for specific age groups in Q1 2021:
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- Ages 20–29: Approximately $16,500
- Ages 30–39: Approximately $51,000
- Ages 40–49: Approximately $120,000
- Ages 50–59: Approximately $203,600
- Ages 60–69: Approximately $208,700
Yet, according to data from the National Institute on Retirement Security (NIRS), the average 401(k) balance for those nearing retirement (ages 55-64) was around $144,000. Obviously, this average is well below the Fidelity’s figures for those age groups.
However, it’s crucial to note that averages can be skewed by a small number of high-value accounts.
And, when comparing these averages to your retirement savings, note that households often hold more than 1 retirement account.
Tax-Advantaged Accounts for Retirement
Saving for retirement in a tax-advantaged account, such as a 401(k) or IRA, offers several key advantages:
- Tax Benefits: Contributions to these accounts are often tax-deductible, reducing your taxable income in the year of contribution. This upfront tax advantage allows you to keep more of your income while saving for retirement.
- Tax-Deferred Growth: Earnings within these accounts grow tax-deferred, meaning you won’t pay taxes on the gains as long as the funds remain in the account. This compounding effect can significantly boost your overall returns over time.
- Potential Employer Matching: Many employers offer matching contributions for 401(k) plans, effectively providing you with “free money.” Taking advantage of employer matches maximizes your retirement savings and accelerates your wealth accumulation.
- Consistent Contributions: These accounts often allow for automated contributions, ensuring a disciplined and consistent approach to saving for retirement. Consistent contributions over the long term can lead to substantial retirement nest eggs.
- Diverse Investment Options: 401(k)s and IRAs typically offer a range of investment options, allowing you to diversify your portfolio based on your risk tolerance and financial goals. Diversification helps manage risk and enhances the potential for long-term growth.
- Flexibility in Withdrawals (with Considerations): While contributions are tax-deductible, withdrawals in retirement are generally subject to income tax. However, certain retirement accounts offer flexibility, such as Roth IRAs, where qualified withdrawals are tax-free. Early withdrawals may be subject to penalties, emphasizing the importance of long-term planning.
- Savings Discipline: The structure of tax-advantaged retirement accounts encourages a disciplined approach to saving. Knowing that there are tax advantages tied to retirement contributions may motivate individuals to prioritize long-term financial security.
- Asset Protection: In some cases, funds in 401(k)s and IRAs enjoy protection from creditors, providing an additional layer of financial security.
In summary, saving for retirement in tax-advantaged accounts provides a combination of immediate tax benefits, long-term growth advantages, and disciplined savings practices. It is a strategic and efficient way to build a financial cushion for retirement while optimizing tax efficiency throughout your working years.
