How Much Money Americans Have in Their 401(k)

The latest Fidelity retirement study shows that the number of retirement millionaires jumped in the second quarter of 2023. There was a 10% increase in individuals holding 401(k) accounts, with over a million compared to the previous quarter. However, the average American has a significantly smaller 401(k) account balance.

Who Are the Retirement Millionaires?

Although the Fidelity study does not provide a breakdown of the professions of retirement millionaires, it is safe to assume that high-income earners have a more significant potential to save money in their retirement accounts. 

Amar Shah, CFA, CFP, works with many clients that have 7 figure retirement balances. He says, “Most of our clients in their mid to late 60s are transitioning into the next chapter in life and stepping away from their original professional careers. Clients who have accumulated these large balances typically have been professional business owners like doctors, lawyers, or engineering consultants.”

High-income skills often pave the way for lucrative professions that enable individuals to allot a hefty portion of their income towards retirement savings after comfortably meeting their living expenses. These skills, which may range from advanced technical abilities to specialized knowledge in fields such as medicine, law, or financial management, command a premium in the market. Professionals with these skills typically garner 7 figure salaries, providing the financial leeway to prioritize long-term savings. 

However, it’s essential to note that high incomes are not the sole pathway to substantial retirement savings. Individuals can also accumulate a sizeable retirement nest egg by adhering to a disciplined saving and investment strategy. 

Angela Dorsey, CFP, says, “What is interesting is that you don’t need an unusually high income to reach one million in retirement assets.” 

Some of her retirement millionaire clients include a Senior Human Resources Specialist with a $95,000 annual salary and a Marketing Manager with a $101,000 income. 

Furthermore, many employers offer matching contributions to 401(k) accounts, which can significantly accelerate savings growth. Therefore, even individuals with modest incomes can aspire to achieve the status of retirement millionaire by focusing on sustained saving over time and leveraging employer contributions. The commitment to financial discipline truly matters, not merely the size of the paycheck.

Average Retirement Balances Look Bleak

Although retirement accounts with over a million dollars capture the imagination, the average American has much lower savings balances. 

The same Fidelity study shows that the average IRA balance was $113,800 in Q2 2023, and the average 401(k) balance was $112,400.

A Vanguard study released in June 2023 showed that in 2022, the average account balance for Vanguard participants was $112,572, and the median balance was $27,376.

The substantial disparity between the median and average balance arises from a limited number of sizable accounts that considerably elevate the average above the median. 

The U.S. Census Bureau paints a similarly bleak picture of median IRA and 401(k) account balances at $30,000.

Getting Retirement Savings Back on Track

Numerous factors have posed challenges for individuals looking to save for retirement. However, if your retirement savings fall below your desired level, there is still an opportunity to rectify the situation.

Holistic Asset Allocation

When considering asset allocation for optimizing retirement savings, looking beyond just your 401(k) account is crucial. Many investors must consider other income-producing assets besides their retirement accounts, which comprise their total net worth. 

Define an approach to retirement savings, encompassing all your assets, including 401(k), Individual Retirement Accounts (IRAs), brokerage accounts, and real estate, to provide a more balanced and diversified portfolio. This can help minimize risk while maximizing potential returns, aiding in achieving your retirement goals.

Increase Contribution Rate

Another vital strategy to optimize your retirement savings involves increasing your savings rate as your income grows. Your salary may be relatively low when starting your career, making it challenging to set aside a substantial portion for retirement. However, starting with whatever you can comfortably afford is essential, even if it’s a small percentage of your income. 

As your income increases over time, progressively raise your savings rate proportionately. This strategy, often called “incremental saving,” allows you to grow your retirement nest egg gradually and sustainably without placing undue financial strain on your current lifestyle.

For 2023, the annual contribution limit for 401(k) is $22,500. However, individuals above the age of 50 have the opportunity to make supplemental catch-up contributions of up to $7,500 per year. 

Stay the Course

Kevin M. Arquette, CFP, noticed that staying the course no matter the volatility helped his clients accumulate a seven-figure retirement portfolio. He says, “A noteworthy trait among many of these clients was their relatively passive approach to managing their accounts; they refrained from impulsive reactions during stock market downturns. By allowing the forces of time and compounding interest to work in their favor, they have now positioned themselves to retire on their terms and establish a lasting legacy for their families.

Smart Tax Planning

Having retirement accounts over a million is an accomplishment. However, tax-deferred accounts can result in significant tax hits without proper planning. 

Angela Dorsey, CFP, recommends strategic Roth IRA Conversions. Amounts converted from a pre-tax retirement account to a Roth IRA are taxed as ordinary income. However, these conversions can be done in a tax-efficient way to take advantage of lower-income years, such as the years between retirement and when required minimum distributions (RMDs) begin. Without doing Roth IRA Conversions, RMDs can push a retiree unnecessarily into a higher tax bracket.

Individual pursuing early retirement have a longer window to perform these conversions in a systematic manner known as the Roth conversion ladder.

Readers, is a millionaire 401(k) balance achievable? When do you plan on Roth conversions to avoid a major tax hit?