Nestegg Cycle © The Plight of the Median 401K Retiree

Posting Date: June 01, 2022

There is a "Retirement Crisis" in America.
Article after article is written about the lack of financial preparedness among Americans approaching retirement age.

In today's posting we bring together several threads helping to characterize the crisis, and suggesting an improvement.
This work, originally researched in June of 2021, was one of the first real-world use-cases of,
and this effort drove some necessary improvements in the software itself, namely the capacity to calculate solutions for very LOW GOAL retirements, and to make fine-grained distinctions among contribution rates.

We were able to find large-scale information about the median 401K balances for several age-groups, as of the year 2020 HERE,
and from a different source, the median salaries of workers by age-group, also for the year 2020 HERE .

Happily, both data sets used the same age groupings. We merged the two sets of summary statistics, and added a new column, showing the calculated ratio of 401K_Balance / Salary for each age group. Here it is:

Age 		Median_401K_bal		Median_Salary	401K/Salary Ratio

25 to 34	$10,402			$47,736		0.218
35 to 44	$26,188			$59,020		0.444
45 to 54	$46,363			$59,488		0.779
55 to 64	$69,097			$56,680		1.219
The most telling statistic is the savings to salary ratio of only 1.219 among the 55-to-64 year olds.

For perspective, the "4% Rule" suggests as a starting point, that this sum, DIVIDED BY 25, is a reasonable estimate as to the inflation adjusted payout that could be taken for at least 30 years (requiring some additional assumptions as to how this money is invested, HERE ).

Thus, we're saying that the retirement payout for this hypothetical median retiree is: 1.219 / 25 = 0.04876 of final salary; only about 4.9% of that salary, available for helping with expenses beyond Social Security income during retirement.

That is less than one TENTH of normal, useful nestegg goals in the range of 50% and more. So for instance, a worker earning $5000 per month just before retirement, would be looking at retirement payouts of just under $250 per month, not $2500 per month, out of their nestegg.
Or, if they were expecting and depending upon the larger payout, they'd burn through the whole nestegg in 2 - 3 years.

How and why did these workers amass so little in their 401K accounts?
We don't have actual data for any of the particulars, such as the average investment yield achieved, nor the amounts that workers contributed. However, the range of investment yields, contribution rates, and raises, that can work in concert to produce such dreadful results, is quite limited, so we can make some educated guesses.

Let us begin by applying the Calculator, using 40 working years to agree with the median data, 30 retirement years to simulate the assumptions of the 4% Rule, 3% annual raises, 2.5% inflation, and a GOAL salary replacement of 4.9%, to agree with the analysis just above.

Min Yield required for Broad Range Salary Contribs:

  1 after contrib: yield is same PRE & POST Ret

contrib:     yield:  sav/sal: withdrw:
  2.50% 1    3.811%   1.215X   4.035%   
  5.00% 1    1.805%   1.637X   2.995%   
 10.00% 1 *  0.005%   2.203X   2.224%  from MAX:  9.25%
 20.00% 1 *  0.005%   2.203X   2.224%  from MAX:  9.25%

Some interesting observations:

  The MOST that could have possibly been contributed out of salary, would have been 9.25%, and that would only be true at ZERO interest (technically, 0.005%). Contributions of 5% would have been limited to interest rates of 1.805%; contributions of 2.5% would have been limited to 3.811% interest. By "limited", we merely mean that anything more, would have caused the nestegg to exceed the 4.9% goal inferred from the data.

  AT a contribution of 2.5%, the savings/salary ratio of 1.215X is close to the observed 1.219X, and a more refined calculation brings us to 2.52% contribution and 3.788% yield at 1.219X salary saved.

  The 3.788% interest rate inferred here, seems high for an ultra-safe bank CD product, but according to
The Visual Capitalist , the average interest rate for the past 58 years (as of: October 1, 2020) was 6.1%
so this is quite plausible. The near-zero interest rates of 2020 through early 2022, warp our current perspective.

This calculation was done assuming 3% raises. Here are some alternate raise amounts:

0.0%	1.30%	3.785%
3.0%	2.52%	3.788%
6.0%	4.30%	3.788%
Worthy of note per above: The requirements of 30 year retirement payout, AND a starting point of 1.219X salary, AND an assumed inflation rate of 2.5%, FORCE all these calculations to arrive at the same interest rate, with very minor variations due to rounding and interpolation.
Also, note the surprising downside of larger raises: Contributions need to be larger to achieve a given goal, to offset the fact that prior years' salaries lag farther behind.

But the bigger picture question is, WHY was this overall result so far below any reasonable, serious goal amount?
To begin to visualize the scope of this issue, consider this calculation from, looking at a 50% GOAL salary replacement, but otherwise keeping conditions the same as previously used for the 4.9% GOAL.

As long as we keep other conditions the same, at any given YIELD, the contribution will be proportional to the goal.
For instance, we can achieve the 50% goal with 20% contributions and 4.509% yield. So each 1% of salary contributed into an account yielding 4.509% will add 2.5% to the GOAL achieved,
and each 4% of salary contributed similarly would add 10% to the GOAL achieved at that yield.

Here is 50% GOAL -- same ages, raises and inflation:

Min Yield required for Broad Range Salary Contribs:

  1 after contrib: yield is same PRE & POST Ret

contrib:     yield:  sav/sal: withdrw:
  2.50% 1   10.405%    5.786X   8.643%   
  5.00% 1    8.447%    7.030X   7.112%   
 10.00% 1    6.485%    8.764X   5.704%   
 20.00% 1    4.509%   11.261X   4.441%   
 40.00% 1    2.512%   14.974X   3.339%   
 80.00% 1    0.490%   20.693X   2.417%   

Now let's look more closely at the emerging story:
To reach higher goals while keeping salary contributions fixed, requires more and more investment yield.
The middle column shows yields needed for the higher goals while holding the contribution at 2.5%.
The right-most column shows the Contribution needed for each goal if invested at 7.00% yield:

		at 2.5% CONTRIB		at 7.00% YIELD
	 4.9%	 3.811%			0.82%
	10.0%	 5.851%			1.67%
	20.0%	 7.817%			3.34%
	30.0%	 8.962%			5.00%
	50.0%	10.405%			8.34%
Our median 401K Retiree had small contributions together with small yields, which combined into a very meager retirement nestegg.

We started with Median data, so HALF the accounts did even WORSE than this estimated 4.9% salary replacement.

What could have gone so wrong for so many? Some possibilities. More than one might apply:
  Some family budgets were tight; those people could not afford to contribute more than the minimum.

  Some workers contributed more but then raided their 401K plans to pay for emergency repairs or medical bills.

  Some workers shunned higher-yielding alternative investments, due to expensive fees.

  Some workers shunned higher-yielding alternative investments, because they seemed too risky.

  Some workers failed to recognize that "safety" has a flipside risk: That low returns might not beat inflation.

   And our main contention: there was no guidance, to help visualize how investment choices affect retirement outcomes.
This material is not at all intuitive. Possibly with the assistance of tools (such as, ahem!,, more people would have been willing to boost their contributions a bit, and/or accept some additional risk to grow their money faster.

"Just in time" visualization sessions at the time that workers are making their contribution and investment selections, could go a long way toward improving retirement outcomes.

The following table may help with some starter possibilities for achieving the 50% GOAL.
Each row is a valid "solution" -- That contribution AND that yield, if maintained, will reach the GOAL.

For example, an 8.00% salary contribution paired with 7.118% investment yield, will reach the goal, provided these are maintained throughout all the working years shown, and that the 7.118% investment yield continues throughout retirement.

Min Yield required for Custom_12_2 Range Salary Contribs:

  1 after contrib: yield is same PRE & POST Ret

contrib:     yield:  sav/sal: withdrw:
  2.00% 1   11.035%    5.460X   9.158%   
  4.00% 1    9.078%    6.587X   7.592%   
  6.00% 1    7.932%    7.431X   6.729% 
  8.00% 1    7.118%    8.140X   6.143% 
 10.00% 1    6.485%    8.764X   5.704%   
 12.00% 1    5.967%    9.333X   5.357%   
 14.00% 1    5.528%    9.858X   5.072%   
 16.00% 1    5.147%   10.351X   4.831%   
 18.00% 1    4.811%   10.816X   4.623%   
 20.00% 1    4.509%   11.261X   4.441%   
 22.00% 1    4.236%   11.685X   4.279%   

To be useful to you, this should be re-calculated with any changes needed to reflect your own circumstances,
which include your desired GOAL salary replacement, the three ages, any pre-existing retirement savings,
current assumptions for raises and inflation; and whether or not you'd like to "dial down" the investment risk to a lower rate at retirement time.