Are You Keeping Pace? Comparing Your Retirement Savings to National Averages
How Do You Stack Up Against Others? In Today’s Article, YOU can Find OUT!
Lots Of People Want To Know…
Recently, I received a call from a prospective client who expressed curiosity about her retirement savings compared to others in her age group. I do get a lot of these types of questions in my practice, “Am I doing OK, versus other people”. She, being 60 years old, was keen to understand the average savings of individuals in a similar stage of life.
Thankfully, a great deal of research from the Federal Reserve and Vanguard clarifies this. You’ll have a better understanding of the average retirement savings of people in their late 50s and early 60s at the end of this article. Hopefully, it will help evaluate your personal financial situation as you get closer to retirement and take the appropriate action to increase your savings if necessary.
Now if you’re feeling unprepared for retirement, you are not alone. A recent study from the Federal Reserve found that only 41% of those over 60 feel confident about their savings for retirement. But before we talk about the specific numbers, let’s understand two important terms: mean and median.
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A Few Definitions First!
The mean, or average, is calculated by adding up all the numbers in a group and then dividing by how many numbers there are. The median, on the other hand, is the middle number in a group when the numbers are lined up from smallest to largest. Understanding this difference will help us make sense of the data from Vanguard and the Federal Reserve, which give us insights into retirement savings for people in their late 50s and early 60s.
Let’s break this down with a simple example. Imagine we have five people saving for retirement, and we want to find out the average retirement savings based on their accounts.
Here are the amounts they’ve saved: the first person saved $10,000, the second person saved $100,000, the third person saved $250,000, the fourth person saved $500,000, and the fifth person saved $2 million.
Mean Or Average Vis A Vis Median
To find the average, we add up all these numbers and then divide by the total number of people, which in this case is five. So, when we add $10,000 + $100,000 + $250,000 + $500,000 + $2,000,000, we get $2,860,000. Then, when we divide that total by five, we get $572,000. This means that, on average, each of these five individuals has around $572,000 saved for retirement.
In our example, one person had a much higher savings amount, which made the average look bigger than what most people actually had. This happens when there are big differences in the numbers.
To get a better idea of what most people have saved, we can look at the median. The median is the middle value in a list of numbers. In this case, it’s $250,000. This means half of the people had savings below $250,000, and the other half had savings above $250,000. This is obviously a vastly different number than the average of $572,000.
So, while the average can be influenced by extreme values, the median gives us a more typical picture. It helps us understand what’s normal for most people. Remember this as we discuss the findings from studies by Vanguard and the Federal Reserve.
Now To The Studies!
Let’s check out the most recent data, starting with Vanguard. According to their study, the average person in their late 50s to early 60s has about $208,000 saved in their 401(k) plan. You will also notice the median is much lower at $71,168. Now, many articles and videos tend to focus solely on 401(k) savings. However, this gives only a partial view of people’s retirement savings.
Most folks also have money saved in other accounts like IRAs or Roth IRAs. For a more comprehensive perspective, we turn to the Federal Reserve’s extensive data. Their research shows that the average retirement savings for someone in this age range is $537,000. So, while the average 401(k) balance is around $208,000, the total average retirement savings, including other accounts, is $537,000.
Whenever you come across data that only focuses on 401(k) accounts, it’s important to remember that it’s just part of the picture. This data is incomplete because most people have other retirement savings, like IRAs or Roth IRAs. While the numbers might seem large at first glance, it’s crucial to remember that they’re averages, which can be skewed by a few large accounts.
To get a clearer understanding, let’s look at the median balances from both studies. The median is the middle value, meaning half of the people have less and half have more. According to Vanguard, the median 401(k) balance for someone in their late 50s to early 60s is $71,168. Similarly, the Federal Reserve reports that the median retirement savings for this age group is $185,000. These median values provide a more balanced perspective on the typical savings situation for individuals in this age range.
You might be wondering why there’s such a big difference between the average and the median. Well, it’s mainly because the average gets pushed up by a few people with really large retirement savings. Some of you watching might have $50,000 saved, while others might have millions. These extremes skew the average.
The median, on the other hand, gives a more realistic picture of what most people have saved. So, if you’re in your late 50s or early 60s and you have over $200,000 saved, you’re actually doing better than half of the people your age.
Why Does Everyone Care?
Now, you might be thinking, “Why does it matter how much other people have saved?” Well, it’s not about comparing yourself to others. It’s about figuring out how much you need for your own retirement. Let’s talk about that next.
You might be wondering how much you need to have saved by the time you’re 60. One common rule of thumb is to have saved eight times your annual income. For example, if you make $100,000 a year, that would mean saving $800,000 by age 60.
Now, when you hear that number, it might sound daunting. But I believe it actually overestimates how much you need. This rule assumes a few things, like a 5% rate of return during retirement, which I think is a bit conservative. Historically, well-optimized income portfolios have been able to achieve better returns. So, let’s take a closer look at what you might actually need.
The 8 times rule assumes that your expenses during retirement will be the same as when you were working. But for many people, that’s not the case. In retirement, some expenses decrease or disappear altogether. For instance, by the time you retire, you might have paid off your mortgage or your children’s college expenses. Additionally, you won’t need to budget for commuting costs, and you won’t be contributing to retirement savings anymore since you’re already retired.
These reductions in expenses mean that you may not need to save as much as the rule suggests. It’s important to consider your individual circumstances and adjust your retirement savings goals accordingly.
Moreover, the rule also assumes a consistent rate of withdrawal during retirement. However, as I’ve mentioned in my previous articles, retirement spending doesn’t follow a straight line — it declines in general as you age. Initially, expenses tend to be higher as you fulfill your dreams and pursue activities you’ve been looking forward to. Then, as you age, expenses typically decrease. This is how it should be as it does get tougher to travel and do things as you get older. However, for some individuals, there may be an increase in long-term care costs later in retirement.
Considering this, I prefer to estimate retirement expenses at around 75% of pre-retirement costs. For instance, if you were spending $100,000 annually before retirement, I’d estimate around $75,000 per year during retirement. This approach provides a more realistic target compared to simply aiming for eight times your income. Now if this starting point is too high or too low for your liking, you can of course, adjust up or down as you see fit.
Let’s break down these numbers step by step. Instead of assuming you need $100,000 a year, let’s say it’s $75,000 because your expenses will likely be lower in retirement. Then, we subtract your Social Security benefits. For instance, if you earned $100,000 annually, your Social Security might be around $30,000 per year.
You can get an idea of you Social Security Benefits using this calculator:
Now, let’s consider any remaining shortfall. If you’re married, your combined Social Security benefits could cover some of your expenses. Assuming the minimum spousal benefit, this reduces the gap to about $30,000.
So, you only need to make up for approximately $30,000 from your pension or investments, not the originally estimated $75,000. This simplified approach gives a clearer picture of your retirement savings target.
Now, let’s consider a 5% withdrawal rate. With a 5% withdrawal rate, which I believe is reasonable, you’d need $30,000 / 5%, or $600,000 by age 60, instead of the previously suggested $800,000. Having $800,000 provides a cushion for unexpected expenses, but if you’re single, you won’t have the spousal benefit, so you might need to save a bit more to compensate. This adjusted target considers lower spending in retirement, Social Security benefits, and a more reasonable rate of return.
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More Examples!
Now, let’s consider a couple of different scenarios. If you currently earn $75,000 per year, traditional calculations might suggest you need around $600,000 in savings by age 60. However, a more realistic target might be closer to $375,000 or $400,000. Similarly, if you’re earning $100,000 a year, conventional advice might recommend aiming for $800,000 in savings by age 60. But a more reasonable target could be around $600,000.
This approach offers a more practical savings goal tailored to your individual circumstances. It’s important to work through these numbers yourself and not make any sudden changes to your retirement plan based solely on online advice. Remember, personal financial planning should be done carefully and with professional guidance.
I want to emphasize that I don’t know your specific financial situation, so it’s essential to work with a professional to assess your retirement needs accurately. However, what I really want to stress is that many online assumptions about retirement savings tend to overestimate the required amount. This is because they’re often based on faulty assumptions, and it’s generally safer to err on the side of caution by overestimating rather than underestimating.
If You Feel You Are Behind — Don’t Worry!
Now, some of you might be feeling reassured that you’re doing better than you thought, while others might still feel behind even after adjusting your assumptions.
If you find yourself behind in your retirement savings, don’t lose hope. There’s still plenty of time to get back on track. I’ve witnessed people in far worse situations than yours turn things around and retire comfortably.
Start by getting a retirement projection done, creating a realistic savings goal and then consider making adjustments to your expenses to free up more money for savings. This is the time to be proactive and save as much as possible to prepare for retirement.
You may need to work a bit longer or delay claiming Social Security benefits to ensure a more secure income in retirement. But with some determination and strategic planning, you can take steps towards a more financially secure future.
For some of you, you may have to adjust your investment strategy towards portfolios offering higher expected rates of return. I often see individuals who fear they won’t have enough for retirement, so they avoid risk by placing all their funds in low-yield options like CDs. However, these low returns may not sustain them throughout their retirement years, which could span 30 or 40 years.
Consider reallocating your investments into portfolios to potentially achieve better returns over the long term. Additionally, you might explore creating additional income streams for your retirement years. This could involve taking on a part-time job, exploring online opportunities, teaching classes, or exploring various other options available to you. Finding alternative sources of income can provide added financial security during retirement.
The Bottom Line
Comparing your retirement savings to national averages can offer a valuable perspective on your financial readiness. Understanding mean and median balances guide setting realistic goals tailored to your situation. If you feel unprepared, you are not alone — and analyzing the data can provide clarity and motivate action. Adjust your strategy by exploring additional income streams that can help improve your financial security. Working with a portfolio manager can help you build a personalized retirement plan, likely setting you on the path to a more secure future.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth | iA Private Wealth USA
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