Brett Arends’s ROI: This is how much — or little — is in the ‘average’ 401(k) plan

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Vanguard has just dropped its annual blockbuster survey of all the millions of retirement plans it manages, called How America Saves, and it’s pretty astonishing reading — as usual.

Bottom line: The average reported balance is dismal.

Ignore the headlines, which say the “average” American worker has a 401(k) balance of $142,000. This is merely the “mean,” reached by adding up all the balances and dividing by the number of participants. It is heavily skewed by a small number of very big accounts. (Elon Musk walks into a bar, and the “average” net worth of everyone in it skyrockets.) More useful is the “median,” which is calculated by ranking everyone from poorest to richest and picking the one in the middle.

Today the median American 401(k) balance is … $35,000. No, really. It hasn’t risen that much since 2012. Some 40%, or two in five, have less than $20,000.

And this, let’s remember, is after a record stock-market boom lasting more than a decade and fueled by the Federal Reserve and massive U.S. government deficits. Retirement savers have never had it so good. From 2010 through the end of 2021, the S&P 500
SPX,
-1.06%

produced total returns of more than 400%, quintupling the money of those invested in stocks. Bonds had risen so far that by the end of 2021 they were almost guaranteed to lose money if you held on to them.

Yet after all this the typical balance is derisory.

Oh, and this study relates to 2021, so it doesn’t even factor in the losses since the start of the year.

OK, the average person in the survey is in their mid-40s, so they have time left to save. But what sort of returns can they expect from the next 10 or 20 years? You don’t have to be a Wall Street Chicken Little, forever warning that the sky is going to fall, to fear that the U.S. stock market looks pretty expensive.

Returns in the past decade have been way above historic averages. These things have a way of evening out over time.

Those closer to retirement are typically better off than those in middle age, as you’d expect. But not by enough. The median worker between the ages of 55 and 64 has a 401(k) balance of around $90,000.

To put that in context, that would buy a 65-year-old couple a lifetime annuity of just $5,000 a year— with no inflation protection.

Good luck with that.

Lucky, then, that Social Security is in such good shape. No, wait …

It is an indictment of our retirement saving system that so many people are in such a poor position after so many years of booming markets.

Much of this, of course, is an income story.

For instance, those earning less than $50,000 a year are deferring on average less than 6% of their incomes into their 401(k). For those earning $100,000 to $150,000 the rate is over 9%. It’s tough to save a lot on a low wage.

Those with incomes of $75,000 to $100,000 have a typical 401(k) balance of about $65,000.

But those in the next bracket up, earning from $100,000 to $150,000 a year, have a median balance of almost twice as much, around $116,000.

Vanguard points to big differences by gender, but those, too, turn out mostly to be an income story. Vanguard says the median male worker boasts a balance 44% higher than median female worker. But there are big differences at the income extremes: For those earning below $30,000 a year or above $100,000 a year, the median man has a bigger 401(k) balance than the median woman. But for men and women in the middle income brackets, in other words earning between $30,000 and $100,000, the balances are about the same.

There has been a growing controversy for over a year about the way our retirement tax system is structured. Critics say it doesn’t do enough for low earners. After all, it’s tough to defer salary when you’re being paid the minimum wage.

By the current picture, they’re not totally wrong.

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