- Hello everybody, it's Sam Ansinni from the Financial Samurai Podcast. And in this episode, we want to talk about why the 401k balances by generation, from Gen Z to boomers, are so low. So, Fidelity recently came out with its average and median 401k balances by generation. And they are as follows.

Gen Z, the youngest generation, the average 401k balance is 7,100, and the median is 2,500. I don't fault those numbers at all. Seems pretty normal. But the millennials, the millennials generation, many of which are now 40 and over, early 40s, late 30s for sure, early 40s, the average 401k balance is 44,900, and the median 401k balance is 15,500.

Now we move on to Gen X, which I am technically a Gen Xer, born in 1977. The average, 145,500, but the median is only 44,000. And then finally, we have the boomers, with an average of 215,000, and a median of 61,200. So, these numbers, millennials, Gen X, boomers, and if we look at the median numbers, this is a problem, folks, because how on earth are you gonna be able to retire with a 401k balance of only $44,000?

And then for boomers, 61,200, I mean, how are you gonna live off that? Were these numbers shocking to you, Cindy, when you saw them? - Yeah, they were way lower than I expected, so I was pretty shocked too. - And this is the thing, though. You don't hear a retirement crisis in America where our elders are getting thrown out of their houses or starving on the streets.

I mean, I don't see any kind of articles like that. Do you, Cindy? - No, nothing comes to mind. - Well, there must be a reason why there's no retirement crisis, given how low the average and median balances are. Really, we need to look at the median numbers instead of the averages, because several rich folks bring up the averages.

So, we look at the medians and we say, well, things seem to be okay. And one of the reasons why is because our older generation, a greater percentage of them have pensions. Right now, something like only 16% of American working population has a pension. So, if you have a pension, consider yourself very lucky.

It's like winning the lottery, because the value of a pension, if it's a lifetime pension, could be worth in the millions and millions of dollars. And I wrote a very detailed post about how to calculate the value of your pension, which you should check out in the show notes.

Now, what other reasons could there be for why there's no retirement crisis with the median balances so low? What do you think, Cindy? - Well, one thing that you talked about in your post that is true for me is people change jobs, and typically when that happens, they roll over their 401(k) into a rollover IRA.

And that's exactly what I did. So, I don't have a 401(k) anymore. I have a rollover IRA. So, Fidelity is just focusing on the accounts that they hold that are 401(k). So, there's other types of retirement accounts that people hold. - Right, and there's other 401(k) providers like Vanguard and Principal and many, many other ones.

So, if you just look at the Fidelity numbers, it's like, okay, they're not that large, but Fidelity doesn't account for the entire 401(k) market. And me too. When I left my job in 2012, I rolled it over into an IRA. And the reason why I did so was because, one, I didn't have another job, so therefore I couldn't roll it over to another 401(k) plan because there was no other 401(k) plan.

And just as a side note, I wrote a new post on the 60-day rollover rule, and the rule states that you have 60 days to roll over your 401(k) or IRA to another plan, and during those 60 days, you could actually withdraw some money and use it to do whatever you want, penalty-free, tax-free, so long as you put that money back within 60 days.

It's a little bit complicated. It's not as easy as I just said, so take a look at that post, but if you need funds and you wanna tap your tax-advantaged accounts, there's the 60-day rollover rule. So, I decided to roll it over to an IRA because there was more flexibility.

I didn't have to invest in the funds that were offered in my 401(k), so I was not a prisoner. I had maximum flexibility to invest in whatever I wanted, ETFs, low-cost index funds, single stocks. I had carte blanche flexibility, including fixed income as well. And so, overall, that has turned out pretty well because I invested for the long-term and I didn't trade my IRA, and that is something that people need to be aware of.

When you roll it over to an IRA, you could have the temptation to start trading your portfolio, and that is almost always a bad move for returns long-term. So, guess what, folks? My 401(k) balance is actually quite small. I looked on my Fidelity account, and I have a solo 401(k), and it's about $267,000, and that's pretty small for my standards for what I think people should have in their 401(k)s if they continuously max them out at the age of 46, which I'm at right now.

Now, $266,000 compared to the median for my generation of 44,000 for Gen X is quite high. But man, if I only had $266,000 right now and that's all I had for my retirement, I would probably be panicking right now. Well, what I would probably be doing would be working right now.

I wouldn't be not working. I would get a job and try to beef that up. But because I also have the rollover IRA and I have a SEP IRA and I have a solo 401(k), combined, these tax advantage counts is over a million. So, Sydney, what type of tax-advantaged retirement accounts do you have, and how much are you counting on them for traditional retirement?

- So, I actually don't have any 401(k)s anymore. I have a rollover IRA, I have a SEP IRA, and I have a Roth IRA. So, I have three different types of retirement accounts. And I am not counting on Social Security for my retirement, although I'm gonna treat it as a bonus if I do get it.

Altogether, I don't have a million, but I'm pretty close to that. So, I'm also investing in my after-tax investment account as a supplement to my retirement accounts. - Right. For those who wanna achieve financial freedom sooner, fire, in other words, you really need to beef up your taxable portfolio, your after-tax investment accounts, your rental property portfolio, because these investments, these portfolios, are what's gonna spit out that tappable passive income that you can use to live your life until 59 1/2, when you can touch your 401(k) and IRA money penalty-free, and also until 62 1/2 plus when you are eligible to withdraw from Social Security.

I think the maximum Social Security benefit amount an individual can take is over $4,000 now. So, if we keep on going the way we're going, we're gonna be able to get to the max, because the FICA tax limit is something like 122,600, where the FICA tax and Social Security and Medicaid tax, it taxes income up to that level.

So, we've been able to make that for a long time now. So, in retrospect, if we do get Social Security payments in 15 years, it should be pretty good, because inflation adjusted, it's gonna be well over $4,000 a month. Do you think you can live off 4,000 plus a month?

- I think so. I don't plan to change my lifestyle habits dramatically in any way. I think readers know that we are frugal in the way that we live our lifestyle. So, I think it's doable. - Yeah, oh, so let me clarify, folks. The 2023 FICA tax rates and limits, it's not 122,000 or whatever I said.

It's actually 160,200 of your earnings are subject to the Social Security tax, and that's up from 147,000 in 2022. And then there's an additional 0.9% surtax on top of the standard 1.45% Medicare tax for those who earn over 200,000 for single filers, or 250,000 for joint filers. So, that is, whoa, that's a lot.

It's interesting how I haven't been in the workforce for so long that I didn't realize, whoa, I guess inflation adjustment, the FICA tax has gone up that high. Did you realize that was 160,200 per person? - No, I wouldn't know exactly off the top of my head. 122 or 23 or whatever you said did sound a little bit low, but I didn't know it was as high as 162.

- No, it's 160,200. - Oh, sorry, yeah, that's high. - That is high. And so, you know what? Every dollar you make above 160,200 isn't subjected to the FICA tax, which specifically is 6.2% Social Security tax, aka OASDI, and then a 1.45% Medicare tax. Now, if you're self-employed, aha, you've gotta pay both sides.

So, we're talking double 7.65%, and that is a lot. And this is one of the reasons why people who are self-employed often incorporate as an S-corp, where they pay themselves a lower salary, which faces the FICA tax, and then they pay the rest of their profits in terms of distributions, which don't pay the FICA tax.

And this is a little bit complicated in the weeds, and I also have a post on this, but you don't wanna have your distributions really be much greater than 50% of your total compensation. And another reason why the median or the average 401(k) balance is so low is because I think life just gets in the way.

Many readers have told me about their situations, and I'd like to share it with them. So, here's Joe. He's 42 years old, and he makes $120,000 a year as an engineer. He's been working for 19 years, and he has 80,000 in his 401(k), right? He said he never considered maxing out his 401(k) because he always thought he wouldn't have enough money left to take care of his wife and his son.

His wife worked for the first eight years and decided to stay at home after giving birth. Going from a two-income family to a one-income family is difficult if you're not used to saving half. Case study number two, Sally's 32 years old and makes $75,000 a year plus bonus as a medical equipment sales rep.

She got her master's degree in health and graduated with $27,000 in debt. So, she pays $500 a month in student loans now starting October 2023. After seven and a half years of working at a reputable firm, Sally's 401(k) retirement balance is $70,000 compared to a recommended $127,000 after eight years of work experience.

And she basically said, look, education is expensive, and she had debt, and she lived in a high-cost living area, so she could only save what she could. Another case study, Susie, 34 years old, single, makes $150,000 plus bonus as an investment banker in San Francisco, and she decided to take a break.

She was burned out and wanted to try something new, and she wanted to do bakery. So, she tried to be a baker for two years, and it only paid something like $18 an hour while she was standing in front of a hot stove and a hot oven for eight hours a day, and she said, screw that.

But that two-year hiatus cost her a lot of contributions. And here's another case study by a highly educated couple. Many, quote, above-average people do not start working at age 22 and incur substantial debt before they start working. For example, I am a lawyer that obtained a master's degree and then a law degree before starting my career at age 28.

My wife is a doctor who completed her residency and started practicing at age 28 as well. Both of us started our careers with substantial student loan burdens, over $325,000 between us. Our late start means we lose a lot of magic of compounding interest, and our debt burden takes a big chunk of our monthly income.

These are significant challenges. Here's another case study. What is misleading as to why many people's 401ks are half or less than what they should be is one word. Divorce. I am currently 44 years old. When I was 37 in 2008, I had $125,000 in my 401k, and then boom, stock market crashed, and my 401k was worth $80,000.

Yeah, not fun. Seven years later, my portfolio recovered to $130,000, but then I had to go through a divorce. Now I'm back to $65,000. Ridiculous. Over 50% of marriage goes into divorce, and many men are paying child support and alimony, and aside from losing half our retirement, we now have nothing for years to invest, but I digress.

Hmm, I'm sorry to hear about that. So you see, life does get in the way, whether you're changing jobs, getting a divorce, going through a bear market, paying off student loan debt, trying to help a loved one with their finances. Life gets in the way, which is why there's that old saying, pay yourself first before life gets in the way.

So try to max out your 401k as much as possible. Do it until it hurts, because it's not going to hurt for that long, because you will adjust to your lower cash flow. Just think about it as, oh, like a tax cut. It's like a tax cut as well as a pay cut for your future self.

So we've heard about the various median 401k balances by generation, and this really dovetails well with a previous study from Northwestern Mutual Online, which talked about, for all ages, the expected amount needed to retire comfortably. And that number was $1.3 million. And then the actual amount currently saved across all age brackets, which was $89,300.

So there is a huge, huge 1.2 plus million gap in terms of the expected amount and the amount currently saved. And if we look at, let's say, the expected amount needed to retire comfortably for those in their 50s, that number was 1.6 million. That's a huge number. But the actual amount that people in their 50s saved was only about $111,000.

And then if you look at the 60s, this is interesting. The expected amount drops from 1.6 million for people in their 50s to only $968,000 once they're in their 60s. So something happens there where people transition from working in their 50s to retiring in their 60s, because most people retire in their 60s.

And I think they realize, oh, actually, it doesn't cost as much to retire as I thought it did. It actually costs maybe $700,000 less. So that's a good thing, folks. But the bad thing is the actual amount people in their 60s saved was only $112,500. So still about an $850,000 gap.

So once again, there seems to be a disconnect with how much we think we need to retire and live comfortably and how much we actually have. And I can explain the one thing that I realized after I retired in 2012. And that is, once I retired, I didn't realize I no longer needed to save for retirement.

Because if I was truly retired and happy with the net worth and the investments that I had, I no longer had to save. So I was saving 50%, 60%, 70%, 75%, maybe 80% of my after-tax income over the last 10 years before I retired. So if you think about it that way, let's say I made $200,000 after-tax, just for ease of numbers.

And I was saving 70% of that. That means, what was I living off? $60,000, right? So suddenly, if I retire, I can not have to save $140,000 anymore. And when I did leave in 2012, I had about $80,000 in passive and semi-passive investment income. So suddenly, I didn't have to save 70% anymore.

And I was living off $80,000, which after-tax, let's say, is about $60,000. Tax rate is not that high at $80,000. And then, boom, there you go. I realized I was able to maintain a similar standard of living, but I just didn't save more for retirement. Which actually felt really weird, because I had been saving so aggressively for so long.

So that is an inside scoop that I felt firsthand. And hopefully, this gives people a little bit better calibration of how much they actually need. You probably don't need as much as you think. We talk a lot about the 4% rule, the rate of withdrawal, the safe rate of withdrawal.

We talk about the financial samurai safe rate of withdrawal, which is 80% of the 10-year bond yield, which is the risk-free rate. We also talk about trying to get a net worth equal to 10 to 20 times your average gross income. I think using a multiple of gross income is more honest.

It's more challenging. It's better, because you can't cheat your way to early retirement or financial independence by slashing your expenses to almost nothing. Sydney, I've been talking a lot. What are your thoughts about where we are, where you are? How do you feel about going into the later part of your years in your 50s and 60s?

And how do you think about retirement in general? I don't feel like I'm retired. I don't have a traditional 9 to 5 job anymore. But I'm working independently. And I feel comfortable with the amount that I have saved if I combine all of my retirement accounts and my after-tax investment accounts.

And also, just with the way we live our lives, I think we have a lot of frugal ways in our day-to-day living. And I feel comfortable with that. OK, so you don't feel like we're in trouble without having two jobs with retirement benefits and other benefits. I think we are saving and investing to supplement the lack of having those traditional retirement accounts now.

OK, so it seems like we see these numbers, these very low numbers, every single year. Every single year, we'll have a survey, oh, the median 401(k) balance, so low. Median IRA balance, so low. The median amount people have saved overall, so low. But yet, life goes on. Life continues to go on in general pretty solidly, at least here in America.

So it seems to me that we have enough safety nets, whether it's through the pension, social security, 401(k), IRA, SEP IRA, 403(b), and also side jobs and hustles, where things will probably be OK, hopefully, for most people. And also, there's this huge inheritance windfall that's coming. And it's supposedly tens of trillions of dollars as the boomer generation passes away and leaves it to the Gen X and the millennials.

And given that the boomers have been investing and saving for the longest, during the biggest and longest bull market in history, there's a lot of wealth transfer to be had. Thoughts on that? Yeah, we've been hearing about that for many years now, about how much is out there that's going to be transferred down.

And you and I know that we're not getting any secret inheritance from our own parents. But I think there are a lot of adults our age out there who will. And I think I'm seeing it all around here, at least here in San Francisco, where I see a lot of adult males continuously live at home with their parents in their 20s and 30s and maybe now 40s.

And then their parents, let's say, pass away or they have another home. And they just end up living in their parents' homes. And so the easiest and most common wealth transfer, I think, is a home. And another, I think, good wealth transfer is using a 529 account. So instead of giving money, give the gift of education.

And that's something we're focusing on, although community college is looking more and more appealing. But that's the topic of a new episode. All right, everyone. I hope you enjoyed this episode. If you did, please share, subscribe, and leave a great review. We always appreciate it. We read everything. Also, sign up for our free weekly newsletter at financialsamurai.com/news.

If you still want to pick up a copy of our book, "By This, Not That," go to financialsamurai.com/bythisnotthat. And if you're looking for a way to get out of a job you dislike, definitely try to negotiate a severance instead of quit your job, because there's nothing to lose that way.

Go to financialsamurai.com/hteyl for how to engineer your layoff. Take care, everyone.