Here is the latest state of the union for 401ks. First though, what is a 401k and why is it important?
A 401k plan is a basket of investments that you contribute to each and every paycheck. The money is removed from your paycheck prior to taxation. This can be beneficial on a year to year basis because if you contribute enough it could move you to a lower tax bracket or at least lower your immediate taxable income. In 2017 the pre-tax limit was $18,000 in contributions.
A 401k is probably the single most important wealth building tool to have in your arsenal. Typically there is a match, the money is fenced off, automated and hopefully has low fees; the perfect storm to build wealth and reap the benefits of compounding.
A quick history: In the 1970’s a group of high income earning folks from Kodak approached Congress to allow a portion of their salary to be invested in the stock market and thus be exempt from income taxes. This became law in 1978.
Here are the average 401k balances by age group:
Under 25 $5,000
65 and older $200,000
Source: Vanguard 2017
Vanguard collected this data last year, so these numbers may be a little higher now with further contributions and a good tail wind of the stock market.
These averages are not necessarily that good. It is good to know where you may fall on an average perspective within your age group, but Americans are not the best savers and investors. For example, the average 65 year old would only be able to draw $8k a year off the $200k using the 4% rule. Now, if that couple had a paid off house and social security, it might be enough to cover their expenses in a low cost of living area, who knows?
The bottom line is to pump that 401k up if you have several working years ahead of you. You can use the averages above as a benchmark to see how you are doing compared to your peers.