Arguing that studies showing that the 401(k) account balances of most Americans will not support a comfortable retirement lifestyle, Fidelity Investments cites bad math as the culprit in predicting gloomy futures for retirees. While the company does agree that the average American 401(k) balance is too small to cover expenses, it says that looking at this single average is not enough.
The reasoning behind the argument is the fact that the averaging of overall 401(k) balances includes everyone from all age groups. Considering that new 401(k) plans where little is saved are being lumped in with accounts that have grown for 40 years, the picture the data paints may be considerably skewed. Employees in their 20s and 30s haven’t had sufficient time to generate a substantial nest egg and are pulling down the average savings of much older workers who have been saving throughout their lives.
Fidelity says that in order to get a more accurate understanding of real-life savings habits the same individuals must be monitored over an extended period of time. To back up its position, Fidelity shared example data illustrating the main point:
• The average balance of 401(k) participants between 30 and 34 years old was $4,600 in March 2002. A decade later saw the balances for the same group rise to $78,300.
• Employees in the 55 to 59 year age bracket with average balances of $77,700 in 2002 saw a 10 year increase to $245,000 in 2012.
Fidelity argues that this type of segmented averages is more accurate, and incidentally more positive, than simply averaging all balances together in one lump.