How can gigantic financial services corporations – competitors Fidelity and Vanguard – analyze similar data on Americans’ 401(k) balances and come to wildly different conclusions? And, more importantly, which analysis is correct?
According to Fidelity’s most recent “Retirement Analysis” report, the average 401(k) balance in the first quarter of 2019 was $103,700, representing an 8% increase from 2018’s fourth-quarter number of $95,600.
Vanguard’s annual “How America Saves” briefing is more detailed than Fidelity’s report and gives a different result. It pegs the average account balance for Vanguard participants at $92,148. But then Vanguard adds that the median balance is a much lower $22,217.
This addition explains the dissimilarity between the Vanguard and Fidelity numbers. This disparity stems from the different methods or statistical approaches they use to calculate their respective values. In essence, we’re talking about the difference between the mean (or average) and the median.
We’re going to need to review a bit of college-level statistics to provide context on these important savings numbers. So, hang in there with me.
Let’s start with an illustration. Imagine Warren Buffet’s step-nephew has $1,000,000 saved, and nine other people have only $1 socked away. Now, do these numbers indicate that everyone has $100,000.90 in their nest egg? If you look only to the mean, the answer would be yes. That’s because $1,000,010 divided by ten gives you $100,000.90.
But we all know that’s not true of the unlucky nine. Instead, the median paints a more realistic picture of our scenario. Remember, the median is the value separating the higher half from the lower half of a data sample. So, it’s the number in the middle of a set of numbers. In our example, the median would be $1, much closer to the truth of the wealth of the group.
Barrons recently analyzed this issue in a great article. We may expect the median to be close to the mean, but when it comes to retirement savings, this isn’t necessarily the case. “The truth is the average account size, though it is often cited as an indicator of overall investor health, is misleading,” says Barrons.
There are folks out there who have many millions of dollars in their retirement accounts (or billions – I’m looking at you, Jeff Bezos). The numbers from these folks skew the average, making it larger than it perhaps should be.
“Anyone well-versed in statistics…would tell you that when a population’s average exceeds its median by an order of magnitude, as in the Vanguard study on retirement account size, that you’re dealing with positive skew,” said Paul Winter to Barrons. Winter is a financial planner at Five Seasons Financial Planning in Salt Lake City.
In plain language, this means that the average is far higher than the median. What’s happened is that a small population of folks with enormous retirement savings have inflated the average. Thus, the mean gives an incorrect view on how much everyday Americans really have in their retirement accounts.
So, that’s where the median comes in to clear things up a bit. It takes all of the data and targets the exact middle on the 401(k) savings scale.
Now, while the median is a better representation of average retirement health in the US, it also has flaws. According to Barrons, the retirement health of younger working individuals may skew the median down, because they may move from job to job without rolling over their 401(k) accounts.
So, the average amount that Americans have saved for retirement is a tricky number to pin down. A report that includes additional data with the mean and median numbers, such as what percentage of folks have less than saved than these figures, would be more helpful. Plus, some people have no savings at all. Shouldn’t that percentage be noted, too?
Also, none of these reports take other types of assets into account, say home equity or rental properties. This leads me to the conclusion that you can’t always rely on reports about average retirement amounts.
But what matters much more than numbers, calculations and reports is how you plan for your individual retirement, and how you plan to spend it. You don’t need millions stashed away to enjoy life as a retiree. In fact, based on research for my book, You Can Retire Sooner Than You Think, I found the magic number is a liquid net worth to be $500,000.
That sounds like a lot of money (and it is), but it can be an attainable goal for the vast majority of Americans. If you’re already on the path to reaching this goal (or the goal you’ve set for yourself), then great! If you haven’t yet begun saving, don’t let it get you down. There’s no time like the present, so even if you start small, just start. That’s how healthy retirement accounts are built – with time, patience and intention.