The financial media is always good for a few stories a year on what the average American has in their 401(k) or IRA. Usually, these stories are pretty horrifying.
For example, as of Q4 2020 the overall average 401(k) balance was $121,500, according to Fidelity. For the segment under 30 the average was just $15,000, while the 60 and older segment jumped to about $229,000.
But that average often get’s skewed by heavy savers. The median 401(k) balance for those over 65 is just over $64,000. And that’s supposed to last for 20+ years of retirement?
The 401(k) isn’t getting enough love.
Although 59% of employed Americans have access to a 401(k) saving plan through work, only 32% are investing through one at all, according to the U.S. Census Bureau. That gap is a big part of the problem with America’s retirement savings.
Let’s do the math: It used to be simple: A $1 million retirement account, at a 5% interest rate, could churn out $50,000 in annual income by investing in long-term bonds and simply living off the income. $2M in the bank could all but guarantee you a six-figure income for the rest of your life.
But times have changed, and long-term bond yields aren’t what they used to be.
In 1980 Treasury bill rates were approximately 15% (!!!). But, as of this month, 30-year Treasurys are yielding just 2.25%. And think about it — if inflation is pegged at 2% (a number we’re currently exceeding), you’re barely even keeping up with inflation at that rate. Most likely your savings is losing money over time.
Just because it’s more difficult now doesn’t mean it’s impossible.
So, bonds aren’t the answer anymore. That’s OK, it just requires some more planning and foresight. Knowing how much to set aside in a 401(k) requires having a savings goal and considering your current status, including your age, savings, and projected retirement age.
And mix things up. Don’t go all bonds or all stocks in your portfolio, but find an asset mix that makes sense for your needs and your age, even if that means taking on a little more risk than the bechmarks suggest.