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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.
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.