Average 401(k) Balances… And How YOU Can Do MUCH BETTER Than Average

I came across an interesting article from CNBC the other day. This article highlighted how much Americans have in their 401(k)s. And they broke that information down by different age groups.

So you can really dial into the numbers and see how you compare. Now, let me be clear. I don’t think comparison is super healthy.

As Theodore Roosevelt said, “Comparison is the thief of joy.”

However, it is interesting to see what the numbers look like. More importantly, you can use this information to motivate yourself to do far better than average.

In fact, I think there are two important lessons to learn and implement in your own life to make sure that you do far better than average.

Today, I want to tell you about average 401(k) balances and how you can do much better than average.

Ready? Let’s dig in.

So CNBC recently ran a report titled: “Here’s how much Americans have in their 401(k)s at every age.” CNBC got their information from Fidelity. That’s a pretty good source. Fidelity is the largest 401(k) provider in the United States, managing over $2 trillion in assets. They should have some pretty good insight into this.

First, let’s break down the difference between average and median.

I’ll be using the median numbers. As CNBC puts it: “Median account balance is considered a more accurate representation of what most people have actually saved for retirement.” I totally agree with that.

See, the average is calculated by adding a group of numbers and then dividing by the count of those numbers. The issue with that is, one big outlier can throw the average way off. If 20 people are in a restaurant and Jeff Bezos walks in, the average net worth of people in the restaurant gets inaccurately skewed by Bezos.

The median, however, is the middle data point in an ordered list. Going back to the restaurant example, you’d list in order the 21 people by net worth, lowest to highest, and use the 11th person in the list as the median.

The median 401(k) balances are, honestly, a bit shocking.  Those in the Gen Z cohort have a median 401(k) balance of $2,500; Millennials, $15,500; Gen X, $44,000; Boomers, $61,200.

The Boomer generation is the highest, but that’s not a surprise. Boomers are the oldest generation on the list, which means they’ve had the most time to save, invest, and take advantage of compounding. But the youngest Boomers are 59 years old. And a median retirement account balance of $61,200 is simply not very much money to carry you through a retirement.

That’s how things break down by age. What about all Americans?

Well, per this report, the median 401(k) balance for all Americans is $23,700. That is really low. Now, I’m not saying these figures are the end-all, be-all. Workers could have more than one 401(k) account, such as orphaned accounts from old jobs. I’m not able to tell if that kind of information is factored in here.

Also, some people just don’t have a 401(k). Maybe they invest in totally different accounts. For example, I don’t have a 401(k) at all.

So I’m a big, fat zero there. Yet I’m 41 years old and my taxable brokerage accounts add up to way more than what we’re talking about here. That said, according to the US Federal Reserve, the median net worth of all Americans, as of 2019, is $121,760. And that includes everything. So, unfortunately, I think Fidelity is on the ball here.

What does this tell us?

It tells us that Americans are not good at saving money, in general. Consumerism, perhaps to the point of excess, is rife in the United States. People like instant gratification.

The stats verify this. According to Federal Reserve Economic Data from the Federal Reserve Bank of St. Louis, the personal savings rate for Americans is below 5%. And this isn’t an income thing, either.

According to a different CNBC report, the percentage of six-figure earners living paycheck to paycheck recently rose from 42% to 49% year-on-year. That would imply that half of those making $100,000 or more aren’t saving any money at all, which is staggering.

You can never outearn your wants. Even the US, as a country, is running on debt. No amount of money is ever enough, if your wants are insatiable. Having more does not keep you from wanting more. And if you’re always wanting more, you will never have enough.

You have to decide what’s enough, which will mean prioritizing needs over wants, time over money, and freedom over stuff. For me, there’s nothing I’d rather own more than my own time. And there’s no luxury more impressive than complete freedom over one’s life.

So how can you do much better than average? Well, I have two important lessons to share with you. Keep in mind, this is coming from a guy who went from below broke at age 27 to financially free at 33.

For most of my twenties, I lived beyond my means. The wakeup call for me came in my late 20s when I realized that my net worth – which was nearly negative $30,000 at that time – meant that I was worth less than a baby. I was born into the world with a net worth of $0 – no assets, no debts.

And yet, nearly 30 years into my life, I was worth less than I was at birth, when I couldn’t talk or walk. That’s sad. I’m now 41 years old, managing a large equity portfolio, and financially independent. Here are two lessons I learned, which helped me to turn it all around and can help you to do far better than average.

First? Live well below your means. It’s impossible to build wealth if you’re not living below your means. I don’t mean that figuratively. I mean it literally. It’s math. I don’t care if you’re earning $1 million per year – if you’re spending more than $1 million per year at that income level, you’re broke.

Likewise, earning $50,000 per year and spending only half of it – $25,000 per year – will allow you to build wealth over time. You must live below your means. Aim for at least a 20% savings rate. The higher, the better.

My tip? Focus on the “big three”. I refer to housing, food, and transportation as the “big three”, because these three spending categories account for the vast majority of the average American’s monthly spending. With housing, downsize.

Do you really need 2,000 or 3,000 square feet of space? No. With food, more eating at home. Do you really need to eat out at restaurants and pay someone to cook your food and wash your dishes? No. With transportation, buy used, reliable vehicles. Do you really need a new BMW to get you from one point to another? No.

I’m not just talking the talk. I’ve personally walked the walk. I’m writing this article from a 375-square-foot apartment. With food, I do eat out a lot, but that’s only because I live in Thailand and cheap markets where I can get a meal for less than $3 are plentiful.

When I lived in the States, I almost never ate at restaurants. Car? What’s a car? I don’t own a car. I sold my car back in 2011, and I’ve spent most of the last 12 years living a car-free lifestyle. This choice alone has allowed me to save and invest tens of thousands of dollars. And that brings me to the second lesson.

The second lesson is this: Intelligently invest your savings for the long term. It’s not good enough to just live well below your means. Look, I’m living on about 20% of my after-tax income. That puts my net savings rate at approximately 80%. That’s more than 16 times higher than the average American. And this is despite not earning a super high income. It’s just that I’m very good at keeping costs low.

However, even with that, I can’t just put that money in the bank. It’s imperative to take advantage of the power of compounding. Albert Einstein referred to compounding as the 8th wonder of the world. It’s interest on top of interest.

In my view, the best way to take advantage of compounding is by using the dividend growth investing strategy.  This is a strategy whereby you buy and hold shares in world-class businesses that pay reliable, rising dividends to their shareholders.

These are the companies that figuratively make the world go ’round. We’re talking about the companies that make your toothpaste, your food, your beverages, your medicine, your electronics, etc. We can’t live without these products and/or services, so why not directly profit from all of it?

High-quality dividend growth stocks are wealth- and passive income-building machines. The US stock market is good. But high-quality dividend growth stocks are often better. Why? According to research by Hartford Funds and Morningstar: “Going back to 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.”

Not only that, but according to data from Hartford Funds and Ned Davis Research, Dividend Growers and Initiators have trounced both the S&P 500 and Dividend Non-Payers going back to 1973.

Dividend growth investing tends to filter you right into some of the world’s best businesses. A growing dividend acts as a pretty good initial litmus test of business quality.

Think about it. In order to pay out a reliably increasing dividend, a company has to produce reliably increasing profit. And reliably increasing profit only materializes when a company is selling ever-more of the products and/or services the world demands.

You cannot run a terrible, money-losing business while simultaneously paying out ever-more cash to shareholders for years on end. It just doesn’t work. The dividend cannot be afforded and sustained without the underlying profit there to support it.

High-quality dividend growth stocks are the golden geese laying ever-more golden eggs. If you have a bunch of golden geese popping out ever-more golden eggs for you, why would you ever slaughter these geese?

Indeed, why sell off assets in order to fund a lifestyle when you could just live off of the growing dividends that are produced by the assets? When selling off assets, you run the risk of running out of money. Why take that risk when you don’t have to?

My dividend income is currently far higher than my spending, and this dividend income is rising faster than my spending. This creates a runaway snowball, increasingly growing the gap between passive income and expenses.

You can do a lot better than average! I’ll paraphrase Sir John Templeton: “If you do like everyone else, you’ll have the same results as everyone else.” If you want to be far better than average, you have to live, save, and invest far better than average.

You have to think and live differently. Have you ever heard of the person who lived well below their means, invested their capital intelligently for the long term, and ended up broke at the end? Me neither. Take action today.

— Jason Fieber