Last updated Jul. 28, 2024 by Okechukwu Nkemdirim
Planning for retirement can be a daunting task, especially when trying to determine how much money you need to save. One useful benchmark to consider is the average 401(k) balance by age. By comparing your savings to these averages, you can get a sense of whether you’re on track to meet your retirement goals. In this article, we’ll dive into the average 401(k) balances for various age groups and discuss some strategies for improving your retirement savings. Finally, we’ll answer some frequently asked questions about 401(k) accounts.
What is a 401(k)?
Before diving into the average balances, it’s important to understand what a 401(k) plan is. A 401(k) is a retirement savings plan offered by many employers. It allows employees to save for retirement by contributing a portion of their paycheck, which is often matched by their employer up to a certain percentage. The contributions are made pre-tax, meaning they reduce your taxable income for the year and grow tax-deferred until retirement.
Average 401(k) Balance By Age Group
Let’s examine the average 401(k) balances for various age groups, according to data from Fidelity Investments, one of the largest providers of 401(k) plans in the United States. These figures provide a snapshot of how people of different ages are preparing for retirement.
Ages 20-29
For individuals in their 20s, the average 401(k) balance is relatively modest. According to Fidelity, the average balance for this age group is around $11,800. Given that many people in their 20s are just starting their careers, it makes sense that their retirement savings are still in the early stages. It’s crucial for young workers to start contributing to their 401(k) as soon as possible, even if the amounts are small. The power of compound interest can significantly boost their savings over time.
Ages 30-39
By the time individuals reach their 30s, their 401(k) balances have typically grown. The average 401(k) balance for this age group is about $42,400. Many people in their 30s have advanced in their careers and are earning higher salaries, which allows them to contribute more to their retirement accounts. Additionally, they may benefit from employer matching contributions, which can help to accelerate the growth of their 401(k) balances.
Ages 40-49
Individuals in their 40s have often reached a more stable phase in their careers and personal lives. The average 401(k) balance for this age group is approximately $102,700. By this age, many people are in their peak earning years and can afford to maximize their 401(k) contributions. It’s also a good time for them to reassess their retirement goals and ensure they are on track to meet them.
Ages 50-59
As retirement nears, individuals in their 50s tend to focus more on their retirement savings. The average 401(k) balance for this age group is around $174,100. In their 50s, people can take advantage of “catch-up” contributions, which allow them to contribute an additional $6,500 per year to their 401(k) on top of the standard contribution limit. This can help them boost their savings significantly in the final years before retirement.
Ages 60-69
For individuals in their 60s, retirement is either imminent or already begun. The average 401(k) balance for this age group is approximately $195,300. At this stage, many people are starting to draw down their retirement savings rather than contributing to them. However, it’s still important to manage their 401(k) balances wisely to ensure they have enough funds to last through their retirement years.
Ages 70 and Older
While many people have already retired by the time they reach their 70s, some continue to work and contribute to their 401(k) plans. The average 401(k) balance for this age group is around $182,100. It’s important for individuals in this age group to start planning their withdrawals carefully to avoid depleting their savings too quickly. Required minimum distributions (RMDs) also come into play at this age, which are mandatory withdrawals from retirement accounts starting at age 72.
✓ Short Answer
The average 401(k) balance varies significantly across age groups, reflecting differences in earning power, career stage, and retirement planning. For example, individuals in their 20s hold an average balance of around $11,800, while those in their 60s have an average of about $195,300. These numbers highlight the importance of starting to save early and increasing contributions as one advances in their career.
How to Improve Your 401(k) Savings
Regardless of your age, there are several strategies you can use to improve your 401(k) savings:
Start Early
The earlier you start contributing to your 401(k), the more time your money has to grow. Even small contributions made early in your career can accumulate significantly over time thanks to compounding interest.
Contribute Consistently
Make it a habit to contribute to your 401(k) regularly. Consistent contributions, even if they are small, can add up over the years. Consider setting up automatic contributions from your paycheck to make the process easier.
Maximize Employer Match
Many employers offer matching contributions up to a certain percentage of your salary. Make sure to contribute enough to take full advantage of this “free money.” Not doing so is essentially leaving money on the table.
Increase Contributions with Raises
As you receive raises or bonuses, consider increasing your 401(k) contributions. This allows you to boost your retirement savings without significantly affecting your take-home pay.
Catch-Up Contributions
If you’re 50 or older, take advantage of catch-up contributions to increase your annual contribution limit. This can help you make up for any shortfall in your retirement savings.
Diversify Your Investments
Don’t put all your eggs in one basket. Diversify your 401(k) investments to spread risk and increase the potential for growth. Consider a mix of stocks, bonds, and other assets that align with your retirement goals and risk tolerance.
Review and Adjust Your Plan
Regularly review your 401(k) plan to ensure it aligns with your retirement goals. Make adjustments as needed, especially if you experience significant life changes such as a job change, marriage, or having children.
Seek Professional Advice
If you’re unsure about how to manage your 401(k) or need help planning for retirement, consider seeking advice from a financial advisor. They can provide personalized guidance based on your financial situation and goals.
FAQs
What is a 401(k)?
A 401(k) is a retirement savings plan offered by many employers that allows employees to save for retirement by contributing a portion of their paycheck, often matched by the employer. Contributions are made pre-tax and grow tax-deferred until retirement.
How much should I contribute to my 401(k)?
A general rule of thumb is to contribute at least enough to get the full employer match, if available. Many experts recommend saving 10-15% of your income for retirement, but the right amount will depend on your individual financial situation and retirement goals.
What is the contribution limit for a 401(k)?
For 2023, the contribution limit for a 401(k) is $22,500 for individuals under 50. Those aged 50 and older can contribute an additional $6,500 as a catch-up contribution, for a total of $29,000.
Can I access my 401(k) before retirement?
You can take a loan or make a withdrawal from your 401(k) before retirement, but there may be penalties and taxes involved. It’s generally best to leave the funds in your 401(k) to grow until retirement.
What happens to my 401(k) if I change jobs?
If you change jobs, you have several options for your 401(k) funds. You can leave them in your former employer’s plan, roll them over to your new employer’s plan, transfer them to an individual retirement account (IRA), or cash them out (though this is generally not recommended due to taxes and penalties).
How do required minimum distributions (RMDs) work?
Once you reach age 72, you’re required to start taking minimum distributions from your 401(k). The amount is calculated based on your account balance and life expectancy. Failing to take the required amount can result in significant penalties.
Is it too late to start saving for retirement?
It’s never too late to start saving for retirement. While starting early offers the most significant advantage due to compound interest, starting later means you may need to save more aggressively or adjust your retirement expectations. Catch-up contributions for those aged 50 and older can also help boost savings.
What’s the difference between a traditional 401(k) and a Roth 401(k)?
A traditional 401(k) allows contributions to be made pre-tax, reducing your taxable income for the year. Withdrawals in retirement are taxed as ordinary income. A Roth 401(k), on the other hand, is funded with after-tax dollars, but withdrawals in retirement are tax-free. Choosing between the two depends on your current tax situation and retirement goals.
How often should I review my 401(k) investments?
It’s a good idea to review your 401(k) investments at least once a year or whenever you experience significant life changes. Regular reviews help ensure that your investments are aligned with your retirement goals and risk tolerance.
