Editor's note: This article has been corrected. The average monthly Social Security benefit is $1,907.
The more money you have in your 401(k), the more comfortable a retirement you can set yourself up for. And the nice thing about 401(k) plans is that many employers offer some sort of matching incentive in these accounts. If you contribute some funds from your paycheck, you may be eligible for free money from your employer.
Now, your 401(k) plan balance is likely to grow over time. So if you're, say, 30 years old with only a few thousand dollars socked away for retirement, don't stress. You still have plenty of working years ahead of you to grow more wealth in time for your senior years.
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But if you're 65 or older, at that stage of life, you may not have much opportunity to add money to your 401(k). So you'll want your balance to be pretty substantial at that point.
Recent data, however, shows that older Americans' 401(k) balances aren't necessarily as robust as expected -- and that's a problem.
Older Americans don't have all that much money saved
Among Americans aged 65 and older, the average 401(k) balance is $279,997, according to Motley Fool research based on Vanguard data. The median balance, however, is only $87,725. And when you have a discrepancy like this, it's fair to assume that the second number is more representative of older Americans' finances than the first.
But even if we choose to focus more on that larger number -- $279,997 -- it's frankly not a ton of savings for someone of retirement age to have. Experts have long recommended withdrawing from retirement nest eggs at a rate of roughly 4% per year. If we apply that rate to this balance, it results in annual income of about $11,200. That's not a ton of money.
Of course, most seniors are entitled to monthly benefits from Social Security. But the average monthly benefit right now is $1,907, which translates into about $22,900 in annual income. Combine that with the $11,200 above, and you've got yearly income of about $34,000.
That doesn't necessarily mean you're living at the poverty line. But it also means you may be living very frugally due to having no other choice.
Save early on for stronger results
Many people who are entering or already in retirement with smaller 401(k) balances are in that boat because they didn't have the opportunity to save throughout their careers. Remember, pensions used to be the norm, so a lot of people in their mid-60s and beyond didn't have 401(k)s to start out with. It's also possible that a lot of folks in that age group do, in fact, have some sort of pension income coming their way, which would make a 401(k) balance of $279,997 less worrisome.
But if you're a younger member of the workforce without a pension, then it's on you to set yourself up for retirement so you wind up with well more than $279,997 in savings. And the sooner you start funding your 401(k), the more likely you are to end up with a larger sum of money.
In fact, contributing $300 a month over a 40-year period will leave you with a balance of almost $933,000, assuming your 401(k) earns an average annual 8% return. That's a bit below the stock market's average and is a reasonable assumption for an investment window that long.
The more retirement income you have access to, the more comfortable your senior years are likely to be. Do what you can to start saving from a young age so that you end up with enough money to make your retirement spectacular.
