The 401(k) plan is the most popular form of saving for retirement among today's workforce. It is not, however, the end-all, be-all. There are individual IRAs, Roths, non-tax-advantaged accounts, savings via life insurance or health savings accounts, real estate, pensions, Social Security, and annuities -- to name a few others.
That being said, the 401(k) is still a great barometer for how we, as a country, are doing when it comes to preparing for our golden years. Sadly, we aren't doing that well.
Here are the big numbers
According to Vanguard's annual report, How America Saves 2015 (opens a PDF), the average 401(k) account balance in 2014 was $102,682. In one light, this is enormously positive, as it represents an 83% increase from the average balance at the end of 2008.
Sad to say, however, $100,000 doesn't go that far these days. Using the 4% rule for withdrawals, this would provide about $4,100 to live off each year in retirement.
Even more alarming: That figure is just the mean, and it's pulled up disproportionately by those with high balances. If we take the median 401(k) balance, we get just $29,603, or just about $1,200 per year in retirement income.
But there's a problem: These figures encompass individuals at very different places in their working lives. Clearly, we wouldn't expect the 25-year-old waiter to be earning as much as the 65-year-old CEO.
Therefore, it's more instructive to break these numbers down by both income and age.
Average 401(k) balance by income
Following is the mean and median 401(k) balance of Vanguard clients, broken down by the individual's income.
As we would expect, the average balance grows significantly as one earns more money. Even still, with a median balance of about $125,500, if those earning over $100,000 would retire tomorrow, their 401(k) would provide just $5,000 in income. That's still a major shortfall.
Average 401(k) balance by age
Then again, if someone just got a major promotion at age 35 and is now counted among the country's six-figure earners, we wouldn't expect that person to be retiring anytime soon. That's why it's also instructive to break down the average 401(k) balance by age.
Again, as we might expect, these balances rise with age. At almost $210,000, the mean American over the age of 65 can count on about $8,400 from his or her 401(k). That's still a scant amount. Most likely, these folks are counting on other sources of income in retirement, as well as Social Security, and the pooled resources that a spouse might have as well.
The cruel irony
When it comes to savings for those aged 34 and under, 401(k) balances are woefully low. That's a shame. Money that you save in your 20s and 30s is far more valuable to your retirement than anything you can put away in your 50s and 60s. That's because money invested in your youth has decades, instead of just years, to compound.
No matter your age, you need to start or continue saving for retirement today. A 401(k) is one of the easiest ways to get started. At a bare minimum, make sure you're contributing what you need to get the maximum company match. Even if you're just out of college and it's a small amount, the money's growth over decades will trump all else and help you to enjoy financial freedom in retirement -- instead of trying to just scrape by.
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