Every so often an industry survey will come out with an "average" 401(k) balance. The specific numbers vary, but they are consistently less than even the most optimistic would see as sufficient to provide a financially viable retirement.
Now, in fairness, the validity of an "average," while mathematically simple, depends heavily on its components. Most are no more than the total of all the balances of those in a 401(k), from those just entering the workforce (and thus, by definition, with negligible balances) — and with decades to go to retirement — to those who are perhaps just days away from that point.
Looking at no more than the "average," you can't tell how many are in which category. So, while the average can, over time, provide a sense of the direction in which things are moving, it tells you very little about the adequacy of the overall average savings to fund an individual retirement.
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One way to help provide a more meaningful measure is to segment those balances by specific age demographics. In fact, the EBRI/ICI 401(k) database has long provided not only an average 401(k) balance, but also totals for different groups. To give you a sense of the difference that can make, at year-end 2011, while the total average 401(k) balance was $58,991, the average 401(k) balance for those in their 60s — at least for those with more than 30 years of tenure — was nearly $209,000.
In fairness, $209,000 may not look like very much to have saved by someone in their 60s. But even then, there are many things we don't know about that person's individual circumstances. We don't know if they have a defined benefit pension, for one thing, nor do we know if they have savings outside their workplace. Perhaps just as significantly, we don't know if that average takes into account their accumulated savings in all defined contribution plans, including those savings that might have been left with previous employers or rolled into individual retirement accounts (IRAs) along the way.
Sure enough, as I sit here today, I have three separate 401(k) accounts at three separate employers, a rollover IRA, and a SEP. Anyone trying to glean a sense of my retirement prospects while looking only at my current 401(k) balance surely wouldn't feel very optimistic.
Averages can suffer from being a sum of too many disparate parts – and sometimes from not taking the full picture into account.
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