Since their creation in 1978, 401(k) retirement accounts have become the centerpiece of many Americans' retirement savings plans -- and for good reason. They not only allow workers to tuck away a great deal of money in tax-deferring accounts, but also offer employers an important employee recruitment and retention tool. For many people, their 401(k) will be their single biggest source of retirement income.
There is one ugly truth about the average 401(k) plan, however. Even if you're looking to max out your yearly 401(k) contributions, the typical person struggles to generate enough to maintain the standard of living they've enjoyed while working.
It's not likely to be enough
There are exceptions, of course. Plenty of high earners have been able to contribute the maximum amount of money every year for years and years on end. They've invested wisely, and/or received shares of the company they work for before a massive wave of growth. Some of these folks boast seven-figure 401(k) account values.
By and large, though, most people don't even come close to reaching the million-dollar mark with their 401(k)s.
Why? There are a handful of reasons.
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For one thing, the number of people maxing out their legally permitted contributions is small -- and shrinking. At the same time, individuals are limited less by the annual cap on their total contributions to such a retirement vehicle ($22,500 this year) than by practicality. The U.S. Census Bureau reports 2022's median U.S. household income was $74,580. That was a decent amount of money several years ago. Given today's typical cost of living, though, it leaves little extra to put toward retirement.
This reality is evident in the average size of 401(k) accounts. Mutual fund company (and employer-sponsored retirement plan services provider) Fidelity did the digging, reporting the numbers earlier this year. The average 401(k) balance for people in their 50s currently stands at $183,000, jibing with data from rival fund company Vanguard. Folks in their 60s are faring measurably better, with average balances nearing $300,000.
Even so, these averages are a bit misleading in that they're skewed higher by a handful of ultra-successful retirement savers. The actual median 401(k) balance stands at less than $90,000. It's not unfair to presume many of these individuals saved as much as they feasibly could, whether or not they saved as much as they were legally allowed to.
Just for the sake of argument, let's optimistically say an investor on the verge of retirement is sitting on a 401(k) stash worth $250,000. At today's current interest rates, that amount of money would still only reliably, sustainably generate on the order of $10,000 worth of interest payments on government-issued debt per year. That's less than $1,000 per month... far less than the average monthly Social Security check of just over $1,700.
A 401(k) is just part of a bigger retirement savings plan
None of this is meant to be discouraging. The intent is quite the opposite, in fact. The idea is to encourage you to sock away more for retirement than you likely already are. If you can add more to your 401(k), then it can be a solid choice. But there are also alternatives.
One vehicle to consider utilizing is a traditional IRA. These accounts allow you to sock away up to $6,500 this year (or $7,500 if you're 50 years old or older), whether or not you participate in a work-sponsored retirement plan. Better still, not only are gains and dividends earned within these accounts tax-deferred, in most cases the contributions to them are tax-deductible. You only pay taxes when the money is withdrawn.
Or you may be better served by the traditional IRA's close cousin, the Roth IRA. Roth IRA contributions aren't tax-deductible, but the money does come out tax-free when it's removed in the future.
Perhaps the most compelling aspect of both these account types is their flexibility. While there's an annual limit to how much you can put into them, anyone can contribute to at least some type of IRA. Just be sure to read up on the nuanced contribution and withdrawal rules on traditional and Roth IRAs to make sure they're right for you.
There's also the option of saving for retirement in an ordinary brokerage account. Brokerage accounts aren't tax-sheltered, although that's not necessarily a bad thing. In some cases, the taxes you pay on income from dividends or realized capital gains could be less than you'd eventually pay if you invested in a traditional IRA.
Saving enough for retirement starts with a goal-based plan
The point is, you should aim to maximize your retirement savings. That includes contributing to your 401(k), particularly if your employer matches a portion of your contribution. That's free money. But it also involves doing more.
If you need help getting started on a more complete retirement plan, start here.
