Are You Saving Enough For Retirement In Your 401k? Probably Not!!

by Hank Coleman

The dangers of 401k loansAre you saving enough for retirement? How much is enough? Is there really such a thing as saving enough for retirement? While there are a few rules of thumb that you can look at to find out how much money you need to save in your 401k for retirement, the sad fact of the matter is that we are simply not saving enough for retirement.

We Are Not Saving Enough For Retirement

Earlier this month, Fidelity Investments released its quarterly analysis of the 401k retirement plans that it manages. The report showed that the average retirement investor at Fidelity had an average 401k balance of $77,300 at the end of 2012. This is up 12% from 2011 if you count employer matching contributions. The problem is that this increase is simply not enough. The balances for most 401k retirement plans are far too low for the investors’ ages.

Sam at Financial Samurai wrote an excellent article explaining why the median 401k balance is dangerously low. He has found that life always seems to come along and knock people off of their retirement savings plan that they have set for themselves or have had a financial planner establish. That would not be too bad because we all know that Murphy is out there just waiting. But, we have compounded our problems by not saving enough for retirement in our 401k retirement plans like Fidelity and Sam have found.

So, How Much Are We Really Saving?

According to the Fidelity report, here are the average 401k retirement plan account balances broken down by age group at the end of last year. Ages 50 to 54 had an average 401k account balance of $111,900. Ages 55 to 59 investors had $134,600. Those ages 60 to 64 had saved $133,100 in their 401k plans. And those investors who were 65 to 69 years-old only had $136,800 in their 401k plans.

These amounts are obviously not enough to retire on. For example, a typical annuity of $250,000 earning a 5% rate of return for a 20 year payout will only produce about $1,600 of income per month. Even if you were to earn $2,000 from Social Security and/or a pension, you would still struggle to maintain the same standard of living that you have grown accustom to during your working years with only $250,000 saved for retirement. And, the savings are far lower according to Fidelity as we’ve seen.

According to the 2012 Annual National Survey Assessing Household Savings produced by the America Saves organization and the American Savings Education Council:

  • 66% of Americans spend less than their income and save the difference
  • Only 66% of Americans have sufficient emergency savings to pay for unexpected expenses
  • Only 42% of Americans say they have a savings plan with specific goals
  • 52% of non-retired Americans think they are saving enough for a retirement

Rules Of Thumb – How Much To Save In Your 401k

So, we know that we are not saving enough money for retirement. How much do we need to save? Many financial experts recommend saving 10% – 15% of your income each year for retirement. Other financial planners use a rule a thumb that says you need 20 times your current income as a nest egg goal to save for retirement. These numbers have a lot of assumptions and math behind them as well as simulations trying to consider the likelihood that you will run out of money before you die.

Save 10% – 15% Of Your Income For Retirement

10% is a great, memorable savings goal, and that is why it is often chosen as a starting point for financial planners and their clients. Dave Ramsey recommends people save 15% of their income in his book, The Total Money Makeover. There are many advantages and disadvantages to having a set percentage of your income as your retirement savings goal. With a set percentage, your savings will increase as you earn promotions and raises. But, the percentage method will not take into account an increase in expenses when you are young and have things like education, mortgages, and the like to take care of. It also does not take into account later in life when you have more disposable income to attack your savings.

Save 20x Your Income For Your Retirement Nest Egg

So, for example, if you earn $50,000 per year, the rule of thumb would suggest that you should aim to save at least $1 million by the time you retire in order to replace enough of that income during your golden years. Of course, these numbers change with your assumptions as to the rate of return your investments will earn throughout your life and the rate of inflation. There is also an assumption that you will withdrawal your investment in retirement at a sustainable rate. Many financial experts use the 3% to 4% rate of withdrawal in retirement as another rule of thumb to live by.

I have always been fascinated by the ING “Your Number” campaign. Do you remember those television commercials that were all over the airwaves just a year or two ago? While there are some strong assumptions that go into the calculation of the number, I always think that it is an interesting place to start if you’ve never done the calculation. Please keep in mind that ING is very conservative with their assumptions, and your number may be a just a little high.

How Social Security And Pensions Factor In

The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012 according to the Social Security Administration. This amount changes every month based on the amount that you have paid into the system and the number of people receiving benefits. I do not even think that you should factor in Social Security benefits to your retirement planning if you are currently in your 20s or 30s. Will their be some type of benefits when this age groups retire? Probably, but they won’t be as generous as they are right now. So, the hits just keep on rolling. And, we are not saving enough for retirement  plain and simple.

If you are lucky enough to have a pension in retirement, you can afford to save a little less than others who do not have a pension to rely on. For example, members of the military earn a 50% pension on their base salary after 20 years of active duty service. A Sergeant First Class (E-7) in the US Army would receive approximately $2,150 per month in pension benefits after a 20 year career (depending on the average of his/her highest three earning years…that’s why I say approximately). But, of course, the amount of workers who have pensions to rely on in the United States and around the world is dwindling with a smaller percentage of the population earning them.

America Saves Week and How You Can Ramp Up Your Savings

america-saves-weekAmerica Saves Week is a coordinated effort to raise savings awareness. America Saves is a national campaign involving more than 1,000 non-profit, government, and corporate groups that encourages individuals and families to save money and build personal wealth. The national program is led by America Saves and the American Savings Education Council. America Saves Week started six years ago, and it is an opportunity for organizations across the country, both public and private sectors, to promote good savings behavior and a chance for individuals to assess their own saving status. Typically thousands of organizations participate in the Week, reaching millions of people. There is even a Military Saves campaign as well.

America Saves Week is is February 25th to March 2nd 2013 this year. You can set a savings goal and make a plan on how to accomplish your savings. Join over 310,000 people who have taken a pledge to save. Take the America Saves Pledge today. You can also access your savings and test your savings knowledge with America Saves.

So, you can see that with a pension and Social Security that your retirement saving can be less than you would need to save if you didn’t have these options. But, even with those two retirement vehicles, Americans are still not saving enough for retirement. The Fidelity Investments study indeed paints a bleak picture that we are not saving enough for retirement in the US.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and is currently pursuing his Certified Financial Planner credentials. Email him directly at Hank[at]

Hank Coleman has written 540 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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