The Average 401k Balance by Age, Fidelity Average 401k Balance by Age

The Average 401k Balance by Age

A 401(k) scheme stands as a retirement investment scheme provided by numerous American employers, bringing forth tax benefits for the saver. This arrangement derives its name from a specific segment of the U.S. Internal Revenue Code (IRC). The worker who enrolls in a 401(k) commits to allocating a proportion of each salary to be directly deposited into an investment account.

There is a possibility that the employer might provide a corresponding sum for all or a portion of that contribution. The employee is granted the freedom to pick from a range of investment alternatives, frequently centered around mutual funds. Among the prominent providers of defined contribution plans in the United States are Fidelity Investments and Vanguard.

Fidelity oversees a substantial number of 401(k) plans, totaling around 24,000, and serving over 21 million participants. In comparison, Vanguard manages approximately 1,700 plans and caters to roughly 5 million participants within the same category. The average 401(k) account balance in the United States varies based on age groups. 

Fidelity Average 401k Balance by Age

This table represents the Fidelity average and median 401(k) balances for different age groups.

Vanguard Average 401k Balance by Age

This table represents the Vanguard average and median 401(k) balances for different age groups.

What are the Average Contribution Rates for 401(K) Accounts?

The IRS establishes annual contribution limits for 401(k) accounts, capping the maximum allowable amount per year at $22,500 for 2023, with a higher cap of $30,000 for those aged 50 or above. Despite this, only 15% of Vanguard plan participants reached the maximum in 2022, with this subset generally being older, more affluent, and longer-tenured employees.

Even with consistent maximum contributions and double-digit investment returns, it would take almost 20 years to amass a million dollars, making it impractical for a 25-year-old to compare their 401(k) balance with the overall average. To bolster account balances without hitting the cap, contributing enough to secure an employer match, where available, is advised.

About 49% of Vanguard's plans offer an employer match, often requiring around 6.8% of pay. The average employee contribution is 7.4%, while the median is 6.4%. These figures highlight the nuances of contribution strategies in 401(k) plans.

Ages 20-24:

For those aged 20 to 24, the average 401(k) balance is about $5,236, with a median balance of $1,948. Many in this group are new to work and retirement savings, but initiating contributions to workplace retirement plans, especially with employer matches, is a prudent practice.

Ages 25-34:

Individuals between 25 and 34 years old witness a substantial balance increase, with averages at around $30,017 and medians at about $11,357. As experience and tenure grow, holding multiple 401(k) accounts becomes more common, especially if job changes occur.

Ages 35-44:

In the 35-44 age bracket, averages reach approximately $76,354, with medians at around $28,318. This notable jump, more than doubling the previous range, can be attributed to prime earning years.

Ages 45-54:

Individuals aged 45 to 54 can contribute an extra $7,500 as catch-up contributions. With an average balance of $142,069 and a median of $48,301, this option is beneficial for those feeling behind in retirement savings.

Ages 55-64:

Balances in the 55-64 range average about $207,874, with medians at approximately $71,168. Growth slows, as withdrawals from retirement savings often commence.

Ages 65+:

Balances can decline or grow slower as more retirees tap into their accounts. Those aged 65 and older average around $232,710, with medians decreasing to approximately $70,620.

What does the Term "401(k) Plan" Refer to?

A 401(k) plan serves as a retirement savings arrangement available through numerous American employers, designed to provide tax benefits to the individual saving for retirement. This program derives its name from a specific segment of the U.S. Internal Revenue Code (IRC).

When an employee enrolls in a 401(k) plan, they commit to allocating a portion of their earnings from each paycheck into an investment account. Additionally, employers have the option to match a fraction or the entirety of this contribution. Within this framework, the employee gains the autonomy to select from a variety of investment alternatives, typically centered around mutual funds.

How do 401(k) Plans Operate?

The concept of the 401(k) plan was formulated by the United States Congress to motivate Americans to save for their retirement, offering tax-related advantages. These plans present two primary options, each carrying unique tax benefits.

Traditional 401(k)
Under the traditional 401(k) setup, employee contributions are subtracted from their gross income. This implies that the funds originate from paychecks before income taxes are withheld. Consequently, the total contribution amount for the year reduces the taxable income, serving as a tax deduction for that particular tax year. Taxes are deferred on both the contributed funds and the investment gains until withdrawal, typically occurring during retirement.

Roth 401(k)
In contrast, the Roth 401(k) involves contributions deducted from after-tax income. This signifies that the contributions are drawn from wages after income taxes have been taken out. Consequently, there's no tax deduction during the year of contribution. When withdrawing funds during retirement, however, individuals are exempt from additional taxes on both their contributions and the investment profits.

What is the Appropriate Amount to Save for Retirement?

When considering retirement, it's important to acknowledge the diversity in retirement aspirations and financial requirements. A multitude of factors contribute to evaluating the effectiveness of one's retirement savings strategy. These factors encompass retirement goals, preferred retirement location, and intended retirement age.

While median and average 401(k) balances can serve as intriguing benchmarks, relying solely on them for gauging one's retirement preparedness might not yield the best results. Instead, personal circumstances should be the focal point for establishing retirement objectives.

It's worth emphasizing that every individual's retirement income needs are distinct, underlining the importance of emphasizing a target savings rate rather than fixating on current account balances. A noteworthy observation from studies is that those planning for retirement should aim to replace around 70% to 85% of their pre-retirement income to sustain their desired lifestyle after retiring.

How Can You Choose Funds That Keep Your Expenses Low?

When considering long-term investments, it's crucial to factor in costs. Even a slight alteration in the expense ratio of your investment funds can have a significant impact on your savings over time. Vanguard conducted an analysis using a $100,000 portfolio that yielded an average annual return of 6% over three decades.

Surprisingly, a mere increase of 0.37% in yearly expenses resulted in the investor incurring more than $55,000 in extra costs. Another domain where employer-sponsored 401(k) plans excel is cost management. These plans often provide institutional class mutual funds, which boast lower expense ratios compared to those accessible to individual investors.

Furthermore, these funds typically offer substantial diversification, containing a multitude of different securities within a single fund. To gain deeper insights into low-cost retirement investment options from both Vanguard and Fidelity, explore our compilations of the best Vanguard mutual funds and the best Fidelity mutual funds. 

In recent times, the majority of plans automatically allocate participants into professionally managed investment portfolios, such as target-date funds or balanced funds, according to Stinnett. These options offer a convenient route for retirement investing, ensuring your investment portfolio consistently aligns with your age, risk tolerance, and preferred asset allocation.