Wealth Management & Financial Planning

Wealth Management & Financial Planning

401(k) Realities

The average 401(k) balance is $92,148, according to a 2019 Vanguard analysis of over 5 million 401(k) plans issued by the company. But most people don't have that amount of retirement savings. The median 401(k) balance is $22,217, a better indicator of what most Americans have saved for retirement. However, the health of your 401k is not limited to value alone. How and when those savings are taxed needs consideration.

Individuals use 401k plans as savings mechanisms and direct their full, uninterrupted attention to their account balance. Accumulated savings is only one measuring stick for success. There are other vital questions you should be asking, such as: Are you saving enough? Are you getting the right return? What will be the tax implications on that income? The answers will help you have better insight into the big picture rather than just uncovering a piece of it.

Let's use health and weight as an example of considering more than a single factor.  People often focus on reading the number on the scale without considering other vital metrics such as waistline measurement and blood pressure. Yet all of these components affect overall health.

When I visit my 401k plan's website, it displays the amount of savings that have been accumulated along with the projected income upon my retirement. That sounds like a handy feature, but it does not say how that income will be produced, nor does it reflect the taxation. That is like getting weighed and not looking in the mirror. There is much more to the story.

The majority of my contributions have been to the Roth option. That means a large portion of my retirement income will be tax-free. Looking at the balance alone does not reflect the taxes I have already paid.

A concentrated focus on the account balance takes the investor's eyes off other essential metrics such as the income their account will produce. The number my plan suggests I can take as a monthly income is different than what I, as a professional money manager, agree, will be the outcome. Where and how do they come up with the projected income, and are they creating a false sense of reality?

Part of the 401k concept is to give individuals the opportunity and responsibility to save enough for their future. And while some participants may have lower balances because of different spending habits, more disciplined folks have healthy 401K plans that are successful. They, of course, maintain a higher average balance than the report is reflecting.

You are not average! You were uniquely created with individual goals and a vision for retirement. In the academic world, we dwell on average life spans, average income, average returns, etc. Averages are valuable for national studies, but they don't represent the lives of many people reading this column. Readers tend to have higher incomes, be better savers, are more charitably inclined, and have better-living situations… often resulting in longer lives.

You are not average, and neither is your 401k balance.


Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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