Workplace 401(k)s and IRAs are an important source of retirement savings for most Americans. Unfortunately, new data indicates that these retirement account balances are far too low for millions of pre-retirees. In fact, the median balance among working households nearing retirement suggests that older Americans could be in serious trouble when it comes to retirement readiness. 

The median retirement account balance isn't nearly enough 

The troubling new data about Americans' 401(k) balances comes from the Center for Retirement Research at Boston College. According to the center, among working households with both a 401(k) and IRA, the median combined balance of their retirement accounts was just $144,000 in 2019. While this is an increase from $135,000, the median balance of their combined accounts in 2016, it is still far below where it needs to be to provide sufficient income for retirees. And CRR indicates only half of all working households even have 401(k) or IRA balances, with the rest likely left with no retirement income at all outside of Social Security.

Broken white piggy bank with coins spilling out.

Image Source: Getty Images.

In fact, seniors with the median account balance who follow the 4% rule could find themselves with just $5,760 in annual income from their savings. That rule is meant to ensure seniors don't run short of money during retirement; it calls for withdrawals of 4% in the first year of retirement, with an increase each year thereafter to cover inflation. 

But $5,760 isn't exactly a large sum. And with the average monthly Social Security benefit expected to total around $1,543 in 2021, seniors with that median balance would have just $24,276 in annual income under the 4% rule. This likely won't be near enough.

Most retirees need to replace at least 80% of pre-retirement income to maintain their standard of living (and sometimes much more). With Bureau of Labor Statistics reporting average weekly earnings in the third quarter of 2020 at $994, the typical retired American would need about $41,350 or more each year to avoid a substantial decline in quality of life. 

With such a large gap between what their savings can comfortably produce and the amount they'll likely need, most pre-retirees are in dire trouble, according to the Boston College study. 

What can you do if your retirement account balances are too small?

If your 401(k) and IRA balance is below or near the median, you don't have to give up on a comfortable retirement. But you do need to make some major changes ASAP in your saving patterns and carefully consider where and when you'll retire.

First, you'll have to start saving aggressively to bulk up your nest egg. And once you hit 50, you're eligible for catch-up contributions that allow you to put more money into tax-advantaged retirement accounts including both your 401(k) or IRA. Rework your budget and even consider a second job to get as close as you can to maxing out these accounts, including the catch-up contributions. 

You'll likely also want to consider working a few extra years beyond what you may have been planning. Working longer gives you more time to increase your savings and lets you put off taking distributions from your too-small account balance. It could also open the door to delaying Social Security benefits, which can increase the amount you get and help to make up for any shortfall in your retirement savings.

Lastly, scaling down your expectations for retirement may be necessary even if you can save extra and boost your Social Security. If you're willing to downsize your house or to move to an area with a lower cost of living, you may be able to have a comfortable retirement even on a relatively meager income.