401(k) Account Balances Grow By Almost 12%

Fidelity Investments reported that the average balance of a 401(k) account grew to a record $77,300 at the end of 2012. This is an 11.87% increase from 2011’s average 401(k) balance of $69,100. Further, Fidelity says participants saved an average of 8% of their annual salary. When employer contributions (matching) is included, the amount increased to 12%.

The Good

An 8% salary deferral is actually better than I thought. I was expecting somewhere around 3%. I imagine that the rate is due to employees being automatically enrolled in their 401(k) plans with an automatic 1% increase in savings each year. Still, savers have a long way to go to reach their retirement income needs. Experts suggest saving at least 15% of your salary for retirement. That’s 15% before an employers matching contribution.

Fidelity estimated that two-thirds of the balance increase was due to investment returns. The rest was from contributions and matches. Because you’re employing the dollar-cost averaging strategy in a 401(k), it pays to stick to an investment strategy and re-balance occasionally.

Retiring with a 401(k) account balance of $77,300 will allow you to withdraw only $578.67 per month for 25 years.

The Bad

The average balance of $77,300 is really low. The average balance is low because proportionally, there are many more 401(k)’s that are owned by younger employees that haven’t had a lot of time to accumulate. Those born between 1979 – 1991 only have an average balance of $15,400. Young workers have two things working against them.

1. Young employees are not contributing enough. Whether it’s because they’re not thinking about retirement or “need” the money for other expenses, young workers aren’t putting aside enough to prepare for their future. Most are contributing only what their employer auto-enrolled them at, or contributing just enough to capture the employer match. If you have a 401(k) plan with terrible or high expense investment options, contributing only enough for the match is understandable. Just make sure to take advantage of a Traditional or Roth IRA to boost your retirement savings.
2. Young workers have been extremely risk averse and are not diversified appropriately. Simply put, they’re not allocating enough of their assets into investments that will outpace inflation and grow their money to provide for a comfortable retirement.

The Ugly

If you have a 401(k), you probably don’t have a pension. That means, other than Social Security, you’re on your own when it comes to retirement income. If you retire at 65 years old and your 401(k)’s balance is on par with the average (assuming you withdraw an equal amount for 25 years, an 8% annual return, and 3% annual inflation), you will only have $578.67 to spend each month.

Even if you don’t have a mortgage to pay when you retire, that’s a paltry sum to live off of. Assuming health care expenses will be higher when you hit retirement, you’ll barely have enough to pay basic bills and eat. Let alone pay for once/twice a year expenses like property taxes and home insurance. If you’re counting on Social Security to provide additional income, you’ll still be scraping by. Not a good situation to be in. Don’t wait. Now is the time to get started with retirement savings.