401(k) Balances by Age: What’s Really the Average?

Before you spiral into a financial panic, take a deep breath. That flashy headline is hiding a crucial secret — one that could completely change how you view your retirement savings.

In this article, we’ll teach you how to interpret these headlines, and then, how you can adjust your portfolio strategy based on the truth.

Before diving into a statistics lesson, let’s look at an example of the raw data that journalists use to write articles about 401(k) balances.

Source: Empower

It shouldn’t surprise you to learn that most journalists and publications want to attract as many readers as possible. So, if most people in their 40s have about $160,000 in their 401(k), what would entice them to click the most: A headline confirming they’re on track or a headline saying that they should really have $367,836 because that’s the “average”?

The headline, “The Average 401(k) Balance for 40-Year-Olds is $367,000!”, conflates the idea of the “average person” with the statistical concept of an “average.”

While the word “mean” and “average” mean the same thing in statistics, the statistical mean is skewed by a small group of super-savers. For example, imagine a group where nine people have $10,000 in their 401(k) and one person has $910,000. The mean balance? A whopping $100,000. But clearly, this doesn’t represent most members of the group.

A better representation would be the “median,” which is the middle value if you arranged all people in a line by their 401(k)’s value. In the example above, this would be $10,000, which paints a much more accurate picture of the typical saver in the group.

A few high-earning individuals with massive 401(k) balances pull the mean upward, creating an inflated benchmark that leaves most Americans feeling unnecessarily behind in the retirement race — at least if you trust the headlines.

Headlines blaring “average” 401(k) balances might be great clickbait, but they’re about as useful for your retirement planning as a glass hammer. The truth is, your retirement needs are as unique as your fingerprint, and you shouldn’t measure your financial future against an arbitrary yardstick.

So, how much do you actually need?

There’s no magic number — or even a magic formula — that works for everyone. It’s about finding the sweet spot between living well today and securing tomorrow.

The most important factors to consider include:

• Your Lifestyle – Perhaps you dream of globetrotting during your golden years or prefer a quiet life tending to your garden. Your retirement spending will look drastically different depending on your goals, and so should your savings target.

• Your Income – Your 401(k) is only one piece of the income puzzle. Social Security, pensions, part-time work or other investments might fill in the gaps. And that could influence how much you choose to save in your 401(k).

• Your Health – Medical costs can be a wild card in retirement. Your family health history and personal health status could factor into your saving strategy.

• Your Location – Retiring in San Francisco requires a much larger nest egg than eyeing a quiet town in the Midwest. Cost-of-living variations can make or break your retirement budget and have a big impact on how much you save.

• Your Longevity – People are living longer than ever thanks to advances in healthcare, but that also means stretching your savings longer.

Ultimately, you’re walking a tightrope between two less-than-ideal situations. Save too little, and you risk running out of money when you’re most vulnerable. Save too much, and you might unnecessarily sacrifice your quality of life in your working years.

The “right” amount to save is the amount that gives you peace of mind both now and in the future. It’s not about keeping up with the Jones’s or hitting an “average” benchmark.

Life doesn’t always go according to plan. Whether you changed careers, experienced financial setbacks or simply got a late start, many people find themselves behind on their retirement savings goals. But the good news is that it’s never too late to catch up.

The lowest hanging fruit is maximizing your contributions or taking advantage of catch-up contributions if you’re over 50 years old. In 2024, you can contribute an extra $7,500 to your 401(k) beyond the standard limit. You should also be sure to contribute enough to get your full employer match — it’s essentially free money!

Optimizing your asset allocation also ensures that you’re not taking too little risk to reach your goals. Target-date funds can help automatically adjust your asset allocation as you approach retirement. They start more aggressive and become more conservative over time. Balanced funds can also help maintain a relatively stable mix of stocks and bonds.

These funds are sorted by their YTD total return, which ranges from 9.3% to 12.5%. They have AUM between $814M and $110B, with expenses running between 0.26% and 1.1%. They are currently yielding between 0% and 2.6%.

Headlines touting “average” 401(k) balances can be more misleading than informative. Rather than fixating on arbitrary comparisons, focus on what truly matters — your own financial goals, lifestyle aspirations and individual circumstances. Whether you’re ahead of the median or playing catch-up, what’s most important is actively planning for the future.