October 19, 2017

Average 401k Balance

Do you have enough money in your retirement account? While enough is a relative word here, it's important to know where you stand. Will you be able to enjoy your golden years? Will you have to work until you just can't any longer? Your 401K plays a large role in your future.

Read on to see how most Americans stand regarding their retirement account.

Average 401K Statistics

  1. What is the average 401K balance?
    Today, 401K balances keep hitting record highs. According to Fidelity, the average 401K balance is around $97,700. That's a $2,200 increase from the first quarter alone. It's also almost $25,000 more than five years ago.

  2. What is the average IRA balance?
    The average IRA balance is slightly higher than the 401K balance. At $100,200, IRAs have seen a $27,000 increase in the last 5 years.

  3. What are the top reasons for saving in a 401K?
    If you aren't convinced that you need a 401K just yet, consider these simple reasons:

    • You reduce your tax liability
    • You increase your savings with employer contributions

  4. How much can you contribute to your 401K in 2017?
    The maximum allowed investment in a 401K for 2017 remains unchanged. Employees can contribute up to $18,000 to their 401K, according to the IRS.

  5. How much should you invest in a 401K?
    In a perfect world, you should contribute up to the maximum amount allowed each year. In 2017, that means $18,000. Ideally, by the time you are 40 years old, you should have 3 years' worth of income saved.

    But this takes into account all retirement funds, including your 401K and IRAs. If your employer matches your contributions, make the maximum contributions. In turn, you get free money. These contributions get you that much closer to your goals.

  6. What are the tax savings provided by a 401K?
    Any money you contribute (in the allowed amounts) to your 401K is free from taxation. You effectively reduce your tax lability by investing in your 401K.

    For example, if you make $40,000 per year and you contribute 6% of your income to your 401K, you'd invest $2,400. This knocks $2,400 off your taxable income. The government then taxes you on the remaining $37,600.

  7. How much does the average employer contribute to a 401K?
    The average employer contributes around 2.7% of an employee's salary. Employers typically match $0.50 for every dollar. But you may find some employers that match dollar-for-dollar.

  8. Why do companies match 401K contributions?
    Companies match 401K contributions for a few reasons:

    • To reduce employee turnover
    • Take advantage of the tax breaks

    The more valued employees feel, the more likely they are to stay at their current job. Of course, it doesn't hurt that they get a tax break for the benefit they provide.

Meeting the Requirements of the 401K

  1. What does it mean to be fully vested in a 401K?
    Before you count the "free money" as yours, you'll need to be fully vested. In other words, you must work at the company for a specific period first. If you quit before then, you can't take the company sponsored contributions.

    Some companies vest employees right away. Other make their employees wait as long as 2 years before being fully vested.

  2. What if you leave your job before you are fully vested?
    If you must leave your job before you are fully vested, you can only take a portion of the company contributed funds. For example, let's say your company gives you 20% vestment each year for the first five years. After 2 years, you are 40% vested. If you leave your job after those 2 years, you can only take 40% of the funds the company contributed to your 401K.

Other Retirement Plans

  1. How is a 401K different from a pension plan?
    Pensions are guaranteed income during retirement. They are known as "defined benefit plans." 401Ks, on the other hand, are contribution plans. Employees are in control of their investments and future income. There is no guarantee with a 401K.

    Unfortunately, it's much more difficult today to find a pension plan than it is a 401K plan.

  2. Should you rely on Social Security income during retirement?
    As the average American gets older, Social Security benefits seem to dwindle. Whether you should rely on these benefits or not is a personal decision. But would you rather be in charge of your life in retirement or rely on money that may or may not be there?

    Your best bet is setting up a 401K for yourself. You can make your own contributions and control the aggressiveness of the investments.

Benchmark Statistics

  1. How much should you have in your 401K when you retire?
    No two people will have the same answer to this question. In general, plan to need at least 70% of your pre-retirement income during retirement. Since the median household income is $56,516, you'll need at least $40,000 for every year in retirement.

    The average life expectancy for a 65-year-old man today is 84.3. Today's 65-year-old women are expected to live until 86.3 years old. That's $760,000 and $840,000, respectively, and that's just a minimum.

  2. How many Americans don't have a retirement fund set up?
    Shockingly enough, according to the Government Accountability Office, more than half of U.S. households (55 and older) do not have a retirement account.

  3. What is the average savings of working age families between ages 32-37?
    The Economic Policy Institute defines working age families as those between ages 32 and 61. Of the families they surveyed, they found the average savings of the "new" workers to be just $500. Considering that by age 40, you should have 3 years' of your salary set aside, young families are far behind.

  4. What is the average savings of working age families between ages 56-61?
    You'd expect the families at the end of the working age spectrum to have a much larger nest egg set aside. However, according to the EPI, the average retirement account has just $17,000 in it for this age range.

Taking the Proceeds of Your 401K

  1. Can you cash in your 401K?
    Cashing in your 401K depends on your status. If you still work for the company sponsoring your 401K, then you can't cash in on it. You may be eligible for a 401K loan; we'll discuss that below.

    If you don't work for the same employer, you may be able to cash in your 401K. Whether or not you should, though, is another story. If you do take the money out, you'll pay taxes on the income as well as an early withdrawal penalty.

  2. How does a 401K loan work?
    Borrowing from a 401K is a roundabout way of borrowing from your own money. You are borrowing from your future income.

    You'll pay interest on the money borrowed. Most companies require automatic payroll deductions to ensure repayment. If you've never borrowed money from your 401K before, you can borrow the lesser of:

    • Up to 50% of the balance
    • 50% of the vested balance

    If you've borrowed money before, you may to be eligible to borrow the full amount.

  3. How many 401K holders have a 401K loan?
    The Center of Retirement Research at Boston College reports that 11 percent of 401K investors take a 401K loan each year.

  4. At what age can you start withdrawing from your 401K?
    The magical retirement age is 59½. At this point, you can withdraw funds and not pay the 10% penalty. You will, however, pay income taxes on any money you withdraw.

  5. How are your taxes affected when you withdraw 401K funds?
    You will be responsible for the taxes on any money you withdraw from your 401K. If you withdraw the funds prior to the age of 59½, you'll also pay a 10% early withdrawal penalty.

Changing Jobs with a 401K

  1. What do you do with your 401K when you change jobs?
    Changing jobs gets more complicated when you have a 401K. How you proceed depends on the circumstances. Generally, you have 3 choices:

    • Leave the money where it is (with your current employer's program)
    • Roll it over into your new employer's 401K program
    • Roll it over into an IRA

    Another option is to cash it out completely. However, this isn't recommended. You'll deplete your tax savings and pay the early withdrawal penalty.

  2. How do you roll over a 401K?
    The best method to use when you roll over your 401K is a direct rollover. You let the plan administrators handle the transfer. They roll your current investment directly into another plan, either a 401K or IRA.

    If you handle the transfer yourself, you could be subjected to taxes and the early withdrawal fee. This is because you technically have access to the funds while you wait to deposit them in the new account.

Bottom Line

Everyone should have some type of 401K. It's never too late to start. At the very least, contribute as much as your employer will match. You'll be grateful for this little nest egg when you retire.

Sources and References:

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