By now you’re probably aware that most Americans have inadequate savings for retirement. You’ve also probably heard that social security isn’t quite what it used to be. In fact, if changes to the program aren’t implemented soon, benefits could be drastically lower by the year 2035. For current retirees this may not be a looming concern but for the 120 million people looking to retire within the next 30 years this poses a huge threat. What’s a person to do when companies are no longer offering pension plans, social security benefits are up in the air, and the value of a dollar doesn’t quite go as far as it used to?
The answer is to save. And then save some more. Fidelity recently released data that shows a changing trend in the United States. Their numbers show that the average American’s 401(k) balance at the end of 2016 was $92,500. This was up $1,700 from a prior average of $90,800 at the end of September, 2016. The data also suggests that Americans are saving more of their paycheck for retirement than in prior years. People are contributing, on average, 8.4% of their pay towards their 401(k), which is the highest contribution rate since 2008. Maybe Americans are finally starting to realize that the financial burden of retirement does not rest on the government’s shoulders or those of their employer’s, but instead rests on their own.
Although these numbers are promising for Americans, the fact remains that people are under saved. Most experts say that you can withdraw about 4% from an account in retirement and not outlive your savings (assuming your investments are conservative). This means that the average American wouldn’t be able to withdraw $4,000 a year, or $333 a month, in retirement from a 401(k). Breaking the numbers down in this manner should help put things into perspective. As you would expect the younger generations aren’t quite saving as much as the older ones. This is mainly due to not making as much as people who have been in the workforce longer. Many young Americans are also strapped with student loans that need to be paid off before they can get serious about saving for retirement. Look at the chart below to see the average savings rate by age as well as the average 401(k) balance.
Unfortunately Fidelity did not release detailed statistics on their findings but using their app I was able to get a little bit more detail. I was able to determine average balances, as well as contribution rates, by age and state. People in their 20s formed a group, as did people in their 30s, and so on until age 69. Because of this I was able to break the data down into 255 data points, five per state (and one for the District of Columbia). It’s interesting how people in the northeast, as well as people on the west coast, tend to save more than people in the Midwest. Sure the cost of living is higher there, and typically people earn more because of that, but most people assume that to save money you should avoid high cost of living areas. This data should alleviate people’s concerns about high cost of living areas.
So which state is number 1 for the average 401(k) balance? Well, it actually isn’t a state at all, but rather the District of Columbia. That’s right. Washington D.C. came in with the highest average 401(k) balance with a whopping $126,080. They were followed by Connecticut ($124,940), New Jersey ($117,660), and Massachusetts ($111,620). New York rounded out the top 5 with an average balance of $110,200. Looks like those long commutes and dreary winters may actually be paying off for some people. At the opposite end of the spectrum and bringing up the rear is Arkansas, who saw an average 401(k) balance of just $57,540. Filling out the bottom five states are Mississippi ($57,620), South Dakota ($60,740), Nevada ($62,740), and Alabama ($64,080). Clearly people in the southeast hate saving. Maybe they’re just so excited about their college football and crawfish boils that they forgot to bump up their 401(k) at work. This is highlighted by the low contribution rates for states in the southeast. It should be noted that I did not use a weighted average for the calculation. I simply took an equally weighted average for each state, meaning that I assume 1/5th of the people per state are in their 20s, 1/5th are in their 30s, and so on. Had a true weighted average been done the results may have been slightly different (Connecticut most likely would have been #1 due to their higher median age compared to D.C.), but probably not by much.
Check out the table below to see how the top 10 states fared as well as how the bottom 10 states did. Send me an email or comment on which state you’re curious to see if it’s not included in the data. In a future post I’ll break down the average balance and savings rate by city. I’ll probably be working on pulling this data together for about the next year, so if you don’t hear from me until then, happy 2018 when the time comes.
And finally...here are the middle 31 states for your viewing pleasure.
For updated numbers based on the most recent information see here.