Is Your 401(k) Keeping Up with the Joneses'?

By Retirement Planning GetRichSlowly.org

Would you like to know how much your friends or relatives have in their 401(k)s? Of course you would! And once you found out, you'd compare their balances to yours. After all, most of us want to know how we're doing compared to everyone else -- so we can endeavor to keep up or even do better. Call it "beating the Joneses." Perhaps it's a vestige from many generations past, when relative standing within the tribe dictated access to resources and opportunities to pass along one's DNA. Oh, wait -- it's still that way.

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But to beat the Joneses, you have to know how they're doing. You know what kind of cars they drive; but it's harder to figure out whether their 401(k)s are the equivalent of a new Mercedes or a 14-year-old Lincoln Continental (my first car).

I don't know how much the Joneses have in their 401(k)s, but below is some scuttlebutt about how the average worker is doing, courtesy of reports from Vanguard and Fidelity. Most numbers are as of the end of 2013, though some of the Fidelity numbers are more recent.

1. Average account balance: $89,300 (Fidelity) to $101,650 (Vanguard)

Each number is an all-time high for its respective company. So that's a bit of sunshine shining through the typical gloom and doom we hear about Americans' retirement prospects.

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But don't break out the SPF 50 just yet, because here come some clouds.

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While the average Vanguard account is in the six figures, the median account (the one in the middle - half are worth more and half worth less) has just $31,396. That large difference is due to a minority of really big accounts -- generally held by higher-income, older, and/or longer-tenured employees -- that is skewing the average.

To put those numbers into some context, the median age of an account holder at Vanguard is 46, the median job tenure is eight years, and the median income is $75,000. So this isn't a group of mostly low-income, fresh-faced college grads. But I'm sure that median employee is still good-looking and can dance (says the 45-year-old).

Fortunately, those closer to retirement have bigger accounts: Pre-retirees ages 55 and up at Fidelity have an average account of $165,200, and Vanguard-ians in the 55-64 age range have an average balance of $180,771. Plus, the 401(k) is just one account; most people have other accounts as well as a spouse or two with accounts. As a hint of how much these other accounts are worth, investors with both a 401(k) and an IRA at Fidelity have an average total of $261,400. Most presumably have other accounts elsewhere, plus there's home equity, non-portfolio assets, and other resources not typically incorporated into a financial plan.

Earlier this year, Fidelity released the results of a study that analyzed the past 12 years' worth of characteristics of investors with accounts worth $1 million or more. The average 401(k) millionaire is age 59, earned less than $150,000 annually, contributed 14 percent of income and received an additional 5 percent from the boss (thus, a total savings rate of 19 percent), and worked at the same company for more than 30 years.

2. Average contribution rate: 8 percent (Fidelity) and 7 percent (Vanguard)

Absent a defined-benefit pension or other sources of income beyond Social Security, it will be difficult to retire in the mid-60s on a savings rate less than 10 percent. Some good news: Most employers match contributions, which increases the total savings rate for these lucky employees to 12.3 percent (Fidelity) and 10.2 percent (Vanguard). Alas, that good news is becoming less good for some since many employers are reducing their match, a topic I'll cover in a future post.

For you super-savers, there's good news for 2015: The contribution limit to a 401(k) or its alphanumeric cousins -- e.g., 403(b) -- increases $500 to $18,000. The catch-up contribution for those age 50 and up also increases $500, to $6,000. Limits on IRAs remain the same. In case you are curious, 12 percent of Vanguard plan participants maxed out their contributions in 2013.

3. Stock allocation: 71 percent (Vanguard)

The 45-year-old-and-younger crowd had, on average, more than 85 percent of their accounts in stocks, while those 65 or older averaged a 50/50 split. The non-stock money was mostly in cash and bonds. The Fidelity study of seven-figure accounts found an average 75 percent allocation stocks. That may seem high for someone within several years of retirement. But it is important to keep in mind that most people should plan on living to their 90s, so they won't touch some of their money for a decade or few.

Here's one of the shortcomings of the 401(k) system when it comes to investing in stocks: During tough economic times, many people lose their jobs, the still-working see their salaries get frozen or cut, and many companies eliminate the match. On the whole, money going into retirement accounts declines.

But this is also when the stock market declines, which means it could be a better time to be buying stocks. Historically, the broad market -- as measured by the Dow or the S&P 500 -- has recovered from declines. In the teeth of the Great Recession, the S&P 500 fell as low as 666 (spooky!) but is now at an all-time high of close to 2,000. Unfortunately, many Americans didn't have the resources to buy companies (which is what you're doing when you buy stocks) at much lower prices, and workers got less help from employers. Money flowing into 401(k)s increases as the economy improves but also when the stock market has already begun to rebound. And that's a dang shame.

Forget the Joneses (unless your last name is Jones)

While it may be interesting to know how other Americans are faring, and perhaps get a clue about your relative access to DNA-passing opportunities (studies show that wealth is correlated to perceived attractiveness), your own stats and how they line up with your own goals are all that matter. As I wrote in my now-premature farewell post, I don't plan on ever retiring full time. So crunch the numbers of your own retirement plan, or pay a fee-only financial planner -- such as those in the Garrett Planning Network -- to do it for you.

A final note: Many thanks for the kind "welcome back" comments many of you appended to my "I'm back" post from two weeks ago. They made my day.

Do you find these stats enlightening, surprising, encouraging, or disheartening? Do you give a hoot about what other people have in their retirement accounts? Have you ever discussed specific account balances with someone other than your spouse? 

The original article can be found at GetRichSlowly.org:
Is your 401(k) keeping up with the Joneses?