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Recently, I shared how much the average American had saved in their 401(k)s. The numbers were not good. I had hypothesized that the numbers may not be as bad as they appear since the average American today stays in the same job for 3-4 years before moving on.
If the average American switches jobs that often, there is a good chance that his or her 401(k) balance is low because they may roll over their 401(k) into an IRA.
If that is indeed the case, I wondered what the average American has in their IRA account today.
Traditional vs Roth IRAs
Just to be clear, most people are familiar with the two main types of IRAs available today: a traditional IRA and a Roth IRA. A traditional IRA allows pre-tax contributions, and a Roth IRA allows post-tax contributions. Both of these allow maximum contributions of up to $5,500 if you’re under 50 years of age. If you’re older than 50 years of age, you’re allowed to contribute an additional $1,000. If you need a refresher on these two types of IRAs, click here.
Average IRA Balances
According to the latest data analyzed by the EBRI at the end of 2015, there were more than 27.9 million IRA accounts owned by 22.1 million individuals. These IRA accounts contained assets worth $2.76 trillion.
This breaks down to an average IRA account balance of $99,017 for year-end 2015. When you combine the owner’s other IRA accounts, that average figure rises to $125,045.
Following the graph above, clearly, IRA accounts steadily grow with age based on compound interest. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Those that have reached the retirement age of 65 on average have accounts that exceed $200,000. That is a healthy balance to carry as one enters retirement. In addition to the graph above, adults under 25, have slightly larger balances than those within the 25-29 range. Digging deeper into the numbers, it appears that more people open accounts in the 25-29 age group than those under 25. Therefore, those under 25 years old who open up accounts probably have more motivation to contribute more.
Median IRA Balances
I was talking to a woman at work that said she opened her first Roth IRA when she was 16 years old. She told me that she currently has a “very healthy balance” now that she is in her early 30s.
But as Mark Twain famously said, “There are three kinds of lies: lies, damned lies and statistics.”
The average IRA balances can be deceiving since investors that save more can skew the numbers to look better than they really are.
Looking at the median (midpoint) IRA balance, we see a different number.
By analyzing the median IRA balances, they are almost a third lower than the average balances shared above. On face value, that is scary. Clearly, those in the top end of the range are doing much better than those towards the bottom since there is such a substantial difference between the average and median.
Rollover vs Regular Accounts
What does the breakdown of these accounts look like between rollover accounts and regular accounts?
Traditional IRAs originating from assets rolled over from other tax-qualified plans (TOFR) had the highest average individual balance at $153,865, while regular Roth IRAs had the lowest average individual balance at $38,834.12.
This means that when people leave their companies, they tend to roll their balances over into a traditional IRA, instead of leaving it with their old companies. This is a wise move, as they will maintain control over the money. Additionally, they would avoid a sticky situation if their old company switches 401(k) providers and changes the positions of their funds.
Bleak Balances
Interestingly enough, Traditional IRAs outnumbered Roth IRAs by nearly a 3 to 1 margin. As someone that utilizes a Roth IRA, I thought more people would use the Roth IRA to diversify their tax situation for the future, but clearly, that’s not the case.
People who contribute to IRAs lag when it comes to contributing for the future. I was hopeful that more people who rolled over their 401(k) accounts would have bigger balances.
I implore you all to start saving today. In the future, Social Security benefits may not afford you the lifestyle that you desire. Don’t wait to make the change.
These numbers are slightly less depressing but still not good. I just don’t understand how people can work for 40+ years to only end up with such little savings. I wonder what a good solution would be? It is like people need an immediate short-term benefit to saving or they just won’t do it.
Grant @ Life Prep Couple recently posted…GUEST POST: A UNIQUE GIFT
Not that it would ever get passed, but it would be interesting to see what would happen if the government forced people to invest more into their tax advantaged accounts. I’m sure it would affect the economy so it’ll never happen but it would be fun to see.
Good call on distinguishing between average and median balances. Regarding the Roth vs traditional ratio, I suspect it’s because the Roth IRA had only been around since the 90s. A while generation had only had the traditional option, most of whom won’t bother switching.
Great points Dan!!! The short term nature of the Roth IRA distinctly puts it at a disadvantage. I should dig down to see if there is a difference in age groups.
My IRA is a rollover, so it has more than my Roth. I put money into both 401k and Roth to have both tax benefits now & later. I roll each 401k into the rollover IRA when a job ends.
While having $200,000 at retirement is better than not, that’s only 5 years at $40,000 per year. I am very grateful that my parents saved and invested well, and I don’t have to worry about them wanting to move in with me because they ran out of money.
Thanks for sharing Jacq!!! I have definitely heard from people in the sandwich generation that are worried about the future. Taking care of mom/dad and kiddos is definitely not going to be easy.
Thanks for this, Rob. Overall, it was nice to see that I’m not doing as bad as I thought!
Hahahah…glad to be a morale booster on a Monday 🙂
I’m actually surprised to see the huge disparity between average and median. With the rules on income limits and the general low awareness of the backdoor options I would have thought they would be closer. Thanks for sharing.
FullTimeFinance recently posted…Retirement Withdrawal Strategy
Like you I thought things would be a little closer than they actually are. The data is definitely interesting 🙂
I was pretty surprised that for some age group the average amount was so much hire than the median amount.
When I see these numbers, I would definitely like to set two goals for myself. First, to save more than the median and average account for my age group. Secondly, diversify between the before and after tax accounts.
Leo T. Ly @ isaved5k.com recently posted…12 Personal Financial Questions That Everyone Should Know
Thanks for stopping by Leo!!! It’s definitely a nice benchmark to set up for yourself down the line. It’s even easier to reach these benchmarks when you start early 🙂
Great analysis! I like that you interject all the numbers and figures with interesting quotes. Stats can be powerful yet misleading until we dive into how people got those stats in the first place.
Mr. FAF just started his new job. And we decided to max out this 401(k) for the year while using my income to pay off our mortgage!
Ms. Frugal Asian Finance recently posted…How To Deal With Spousal Envy
Wow that’s awesome Ms. FAF!! Maxing out your 401k and paying off your mortgage. You are going to reach FIRE in no time!!!
I’m not surprised but definitely a bit worried. So many people are short-sighted and are sacrificing their future financial goals by so much short-term spending.
On Facebook yesterday I was pictures of a family throwing a huge party for their elementary age child. Big bouncy, cotton candy machine, other rented “toy” items. It must have cost a bundle. I know this same family is worried about paying for college for their multiple children – they’ve made that comment to me before.
It seems that the average American has this same mindset – and short term actions.
Brad – MaximizeYourMoney.com recently posted…How to Become a Millionaire By Investing Consistently
I’ll never understand that. I want my kid to have a fantastic childhood but at what cost. I personally would much rather have the savings from that party in my 529 than a party I’ll barely remember. But I guess that’s why everyone can make choices 🙂
I am pleasantly surprised by the account balances for the younger crowd. With average balances for the Traditional and Roth IRAs above $10k each for the group under 30, they are positioning themselves nicely for retirement!
I totally agree Taylor!!! It’s nice to see people are jumping on board to get their retirement numbers up 🙂 Hopefully it remains that way.
The balances seem low but most people have a combination of a 401k, 403b, IRA, traditional investment account, and/or real estate. Once you think of all of those things together things aren’t so bleak. Personally, we have a 401k and IRA.
Very insightful looking through the numbers!
Thanks for sharing Justin!!! I’ll have to take a look at the numbers to see what it looks like 🙂
It’s important for people to xfer there IRA over as soon as they are able to when switching jobs. You’re losing out on free money if the company matches every pay period. If you’re working, your money should be working too. I feel not many people know the differences between traditional and Roth IRA.
SMM recently posted…Don’t Be Afraid of the Stock Market
I definitely agree!! I don’t think there is enough education around this. Companies certainly aren’t taking the time since if you aren’t being productive for them you’re not helping them 🙂
I’ve worked for two employers in almost 20 years. Yes, I am the exception. Without contributing to a Roth IRA or SEP IRA I would have none, since I stupidly cashed out my first one when I left my first job.
My current employer just began offering a “Roth” 401k which has me intrigued as a way to save for retirement tax free through my employer.
Jason@Simple Man Money recently posted…8 Secrets for Earning a 5-Star Rating Driving for Uber
Thanks for sharing Jason. You should read my article on Roth 401ks if you’re on the fence.
How weird! I also thought that Roth IRAs would be more popular than a traditional IRA. I can’t even think of a benefit to using a traditional IRA over a 401k, other than maxing out your 401k balance and having another account as a second option.
Mrs. Picky Pincher recently posted…What A Frugal Weekend! September 24
A big benefit for me is that I can always access my traditional IRA to make contributions. I have had 401ks through jobs before but currently I do not have a job that provides one. I have both a Roth IRA and a traditional IRA. I have read a lot of the debate about which is better but I have not come to a conclusion yet.
Beetsandlilacs recently posted…The Five Benefits of Travel Hacking
Thanks for sharing your reasoning!!! It’s definitely not an easy decision to make 🙂
Yeah that definitely took me as surprise. I didn’t even consider a traditional IRA when I entered the workforce.
Interesting post. I am not surprised by the low balances. The ammont that you can contribute to an IRA is much lower than a 401K. When I started investing in the 90’s it was only $2k. As you mentioned, Another reason that the traditional IRA balances are larger is when retirees roll over their 401k into a TIRA.
Dave recently posted…Frugal, not Cheap
I would definitely be interested to see what would happen if they removed the limits. I don’t even want to think how much some people would try to save.
These numbers are not very good. People really are not saving enough for retirement. The numbers should be about 10x higher if people want to retire without fear of running out of money.
Jeff @ Maximum Cents recently posted…My Favorite Travel Credit Card
I totally agree with you Jeff!!! I’d love to see the numbers much higher. Although contribution levels at $5.5k right now make it difficult to really have the upward push. I’d love to see the caps removed completely.
I thought more people would use Roth too. Every member of our household has one (including my nearly retired parents!). Considering adding all those up, it doesn’t look too bad. But those with an opened IRA might just know more about finances so the data seems high because the sample is more bias.
Lily @ The Frugal Gene recently posted…Will You Survive The Great Depression 2.0?
Thanks for sharing Lily!!! That’s awesome that everyone in your household has a Roth IRA. I am a huge fan of them from a tax diversification stand point 🙂
Seeing numbers like this always makes me feel pretty good about where I stand but scared to death for the majority of people!
Miss Mazuma recently posted…Adventures in Landlording – The “Leak”
I totally agree Miss Mazuma!!! I am definitely scared for the average investor out there, especially if they are not confident in what they are doing.
These are pretty good statistics and I’m surprised as well, I like Roth IRA’s better than traditional!
Erik @ The Mastermind Within recently posted…How I’m Building a Business Around Dropshipping T-Shirts
I like the way you’re thinking Erik!!!
Great information you’re sharing Rob. I’m not too surprised at the balances as I’ve been worried for a while about the Gen X’ers and Boomers. Fortunately, we are doing well in comparison. Now to just get these others motivated to save and invest more.
I am trying to figure out ways to motivate others to save more. I have some ideas and hoping to get feedback very soon 🙂
Those numbers are actually a bit higher than I expected. I don’t think many Canadians have $200k in their tax deferred accounts come retirement…
Money Miser recently posted…The Cost of Convenience
Thanks for sharing Money Miser!!! I’ll have to defer to you and Leo on Canadian tax deferred accounts. I know when I am out of my element 🙂
I always love getting a glimpse into stuff like this to get somewhat of a gauge of how I am doing, comparatively speaking. I am a big fan of the Roth IRA. Thanks for sharing this, Rob.
Cody @ Dollar Habits recently posted…How to Harness the Power of Habits
Thanks for stopping by Cody!!! Glad you enjoyed the figures. It was definitely interesting to put together.
Maybe everyone should be given $1000 when they turn 18 and it goes into a life cycle fund. They can add to it, but can’t withdraw till 59 and a half. This would let them see the benefits early. Less of a waste than a lot of goverment programs.
That would be incredible!!! I’d love to see what would happen. Hopefully it would mean people would be better off 🙂
I’m surprised too that not many people are invested in a Roth. Probably because they are not informed enough of the benefits like you don’t have to pay taxes when you start withdrawing money from a Roth unlike a Traditional IRA. Hopefully soon more will be aware of the tax benefits of a Roth so they can open one and contribute right away!!
Kris recently posted…Book Review: The Millionaire Next Door
I definitely wonder if people are well educated in this area. It’s definitely unfortunate hopefully we can continue spreading the word 🙂
Ahh … The median reveals the secret!
I’m always amazed when people tell me that they have money sitting around in their old 401k not doing anything. Its as if they simply forgot about it or just plain don’t care. Why? Why not roll it into a 401k? It could be working so much harder for you.
MyMoneyDesign recently posted…The 10 Best Practical Ways to Budget Your Money and Save More
I’m with you!!! Why let the money sit when you can have it work for you!!!
Totally agree. Spend less, save and invest more. Maximize your 401K contribution at your employer. Roll it over when you change jobs and invest the money wisely in a self directed IRA. Make long term investments, keep investment costs low and let the money compound over the long term.
Tom @ Dividends Diversify recently posted…The Lights Are On And Someone Is Home
The secrets are pretty straight forward like you said. Spend less and invest more. Simple concept but incredibly hard to master at times 🙂
My IRA was a rollover from my previous employer’s 401k. I was given the option to leave the money to my 401k account but decided to roll it over to a traditional IRA account and manage it myself. Excellent decision up to this writing. I feel bad though for the other workers who could not afford to contribute to either IRA or 401k. There are people with zero IRA’s and 401k’s. I happen to know a few of them and one of them is already in her 50’s.
I can’t even imagine having zero in my IRA or 401k. I can’t even imagine thinking about retirement. That would definitely put me into a tailspin.
I am also not surprised by the low numbers and I fully admit I struggle with putting the full amount into my Roth IRA. I max out my 403b and I have a 401(a). And whatever contributions I do make to my Roth IRA they come from my Fidelity Rewards card (I would need a lot of spending to get to $5500). However, I would like to make putting money in their a bigger priority I guess I just have to do it.
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Thanks for sharing Jason!!! Sounds like you are doing an awesome job if you are maxing out your 403b!!! That’s not easy to do and you are definitely in rare company 🙂