Reading financial articles on a daily basis provides me with several possible blog ideas. This week was no different when I found an article that reminded me of a recent conversation I had with my 25 year-old daughter.
We’ve seen these articles many times before. And I’m sure when people read them the emotions of the average American ranges from pride to fear to indifference. This week’s article was about 401(k) balances by age.
In the article, they provide the Q1 2019 average 401(k) balances by age group:
20-29: $11,800
30-39: $42,400
40-49: $102,700
50-59: $174,100
60-69: $195,500
According to the article, the 20-29 year-old range for average balances is $11,800. At 25 and with only 1½ years of contributions, my daughter already has over twice that amount in her 401(k).
On paper and compared to her peers, she is doing much better than the average. And when compared to the average, you might expect her to be pleased with her retirement savings. I’ve educated her to be indifferent to these articles because they mean nothing to her own situation.
But here’s the point. We have 25 year-olds in this country with all kinds of 401(k) balances. Comparing yourself to the average (or even the median) doesn’t do you any good. But we love comparisons to the Jones or Smiths so these types of articles continue.
Why don’t these articles mean much? Because American’s are not good savers. Americans are consumers and many (dare I say most?) are ignoring their retirement savings. To be average is not a benchmark that should even be on your radar.
I want you (and my daughter) to ignore these comparisons and focus on what you can control. You do control your spending, your savings rate, and knowing what you will need to retire.
Average Makes For A Rough Retirement
Last week, I had a conversation with one of my employees. This is an educated person (Finance and Accounting degrees) with years of corporate financial planning experience.
She’s married (the main bread-winner) but doesn’t save very much. She says her house has 3 closets full of her clothes and shoes. She travels regularly for “girls weekends” and always stays in the nicest hotels. And in a few years, she’ll have a teenager ready for college.
Funny (sad really) story … she complained that her husband buys too many fresh vegetables and throw much of it away. This made her mad that her husband for wasting money. I couldn’t make that up but it’s what she told me.
She told me she was raised to think that you only live once (YOLO) and that social security will be there to provide for retirement. If she were a medical doctor, the phrase “doctors make bad patients” would apply to her.
She said it’s against her DNA to save very much or think of her financial future. But that’s her job at work and she’s very good at it. For her it’s “will” and not “skill.” She’s using her upbringing as an excuse because she’s plenty educated and experienced to know better.
Her thinking is just one of many types of people in America and it helps understand why people don’t have retirement savings. So, yes, the average 401(k) balance (or any retirement savings balances) sucks so why would we use it as a comparison or benchmark.
Being average in the retirement savings game will make for a rough retirement. It’s not an accomplishment to be above average either. Don’t let the media trick you into thinking you are doing better than you really are.
Saving 15% Of Your Income Isn’t Enough
Another point in the article is that Fidelity thinks “most American workers should save at least 15% of their income each year.” I’m here to tell you, especially the younger workers, that 15% won’t get the job done. Younger workers should be saving at least 25% of their income.
I can’t predict the future but we have to assume a world where taxes will likely be higher. Troubled social programs, trillions in national debt, and more will demand higher taxes … so we have to predict it’s a possible outcome in our retirements.
This means we’ll need more money saved – that 15% saved isn’t enough. Since we are retirement planning, we have to assume this scenario. Just like we have to assume conservative retirement rates of return for our investments.
And older workers need to go into crunch mode (hyper saving) to catch-up because the numbers in the article show you are not saving enough. The official numbers show that you are in trouble.
Here’s my advice to older folks that are not prepared – downsize your house, sell some of the cars, reduce your grocery bill, stop buying boats or RV’s or big trucks, and start saving your money. Empty your rented storage container and send your kid to the local junior college before sending them to the local state university.
Everything needs to be on the table to save your retirement from disaster.
Final Thought
By the time I’m 62, I’ll have a pension (~$70,000), a paid off mortgage and no debt, retiree healthcare, and $1.3M in portfolio assets. Plus, I’ll get some type of social security. All this and I’m still concerned for my retirement.
My age group (all age groups actually) needs to stop being reckless consumers and start taking control (and responsibility) of retirement planning.
When this happens then we might see the average 401(k) balance rise. Unfortunately, a fear of being poor in retirement hasn’t changed the spending habits of most people.
If you have a friend or relative (or employee) that is oblivious to their situation, all you can do is make them aware and help them if they ask you. And start your kids (young adults) on the right foot and make them aware of what is coming and educate them on the steps to take control of their financial future.
Sorry for such a gloomy, lecturing stepped article but this stuff really gets my blood flowing. It’s so avoidable but people love to buy versus save. Just remember, average is the new broke!
As always, thanks for reading!
Mr. TLR