CNBC recently ran an article stating that there are now a record number of 401k and IRA millionaires according to Fidelity.
Fidelity is the largest 401k provider in the United States with 27.2 million IRA and 401k accounts under its name. Out of the 27.2 million accounts, there are 1.6% of them that now have a balance of a million dollars or more. This comes out to approximately 441,000 accounts with a millionaire status.
The average 401k balance is $112,300, but this can be a deceiving number in many ways. First, it is an average and not the median. The millionaire accounts will pull the average way up. By the same token, people who had just recently started an account will bring down the average.
The other obvious thing to consider is that this is the average for those who have a retirement account. There are about 330 million people in the United States. There are about 128 million households.
There are some people who have retirement accounts through other companies. There are some people who have assets outside of retirement accounts, whether it is cash in the bank, regular brokerage accounts, businesses, or other assets.
This is why it is only a small piece of the puzzle in terms of how Americans are doing overall in a quest for a comfortable retirement.
The article states that baby boomers have an average balance of $210,400, but the median amount is just $69,900. I hope these people have other pensions and/ or assets. Even if you take the average of just over $200,000, this is not nearly enough for most people to have a comfortable retirement, even when coupled with Social Security.
If you have $200,000 and are able to somehow squeak out a 6% annual return above inflation (which I would contend is unrealistic), that comes out to just $12,000 per year without drawing down the principal. Most people can’t live on that amount in 3 months, let alone a year. Even factoring in Social Security, it is well below what is considered a middle class income.
And all of this comes on the heels of a major bull market in stocks over the last decade. What will the retirement status look like for people when we hit a bear market, or even a somewhat prolonged period of stagnation? This doesn’t even factor in the people who have absolutely no retirement savings.
401k Rich and Cash Poor
There is one other major elephant in the room when talking about 401k balances. For most people, this money is essentially locked up until age 59 ½.
If you still work for the employer that sponsors your plan, then you probably can’t withdraw any money at all except in the form of a loan (which will then hurt your cash flow going forward). If you are able to withdraw but you are not at the eligible age as determined by the government, then you will pay a penalty tax on top of the income taxes you owe.
The government already makes us far poorer than we should be, and it adds on to it with its retirement account rules. The only reason that 401k accounts and IRAs exist is because we have an income tax. They are a way to shelter some of your income from taxes. The problem is that you get a list of rules that go along with it.
Many companies are automatically enrolling new employees into a 401k plan. Employees must actively opt out if they don’t want to participate. This is good in one aspect in that it gets more people to save for retirement. It is bad in another aspect in that it reduces present cash flow.
This is why many Americans are faced with a situation where they may have tens of thousands of dollars in a retirement account, yet they are struggling to pay the bills or to take a weekend getaway with the family. This can be the case for people with hundreds of thousands of dollars in a retirement account. It’s possible that a few of the 401k millionaires may even be in this situation.
Someone will refer to their retirement account as “my money”, yet they don’t retain full control over it. They are not allowed to withdraw it at all in many cases. Meanwhile, their options for investing are limited.
This is why it is important to consider the pros and cons of investing in a 401k plan or any type of retirement account. You have to weigh your options.
Everyone’s personal situation is different. My general advice is that if you work for an employer that offers a 401k plan, then you should contribute just enough to get a full match of funds from your employer (assuming your employer matches at all). In many cases, this will be a contribution of 5 or 6 percent on your part.
Beyond that, I think it is better to keep your money under your own control. You need flexibility in life for emergencies, as well as for opportunities.
It is nice to be a 401k millionaire, but it is even nicer to be a millionaire without counting any retirement funds that you don’t fully control.