It's time to stop comparing yourself to the average person's retirement plan. Your goals should be personalized, and the numbers may evolve over multiple decades. Concerning yourself with account balances can be a dangerous oversimplification. People often improve their outcomes by considering their personal circumstances and consistently following important rules over the years.
Focus on the inputs that you control
People often pay close attention to asset accumulation in retirement planning, which is understandable: You spend all of your working life building an investment account, and its balance is a convenient scoreboard. The more you have invested, the more financially prepared you feel for retirement. That's an intuitive approach, but it's not necessarily the most effective one.
Most people are better off zeroing in on the day-to-day aspects that they can control. You can't directly control your investment account balance. It's the cumulative effect of consistent savings and investment behaviors, and it merely represents an intermediate step between accumulating retirement money and distributing it.
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Your savings rate is the most important factor in building your retirement account. Financial professionals recommend saving 15% to 20% of your income each year, and a significant portion of that should be earmarked for retirement. If your employer offers a 401(k) with contribution matches, there's a good chance that you can take advantage of those benefits to direct somewhere from 3% to 6% of each paycheck to your retirement account.
Growth is another important factor. Compounding investment returns can transform your nest egg over the decades if you're saving enough. It's important to maintain an investment portfolio that balances growth and risk. A retirement account should be properly diversified, and the asset allocation should reflect your risk tolerance and time horizon. Following those rules, and reviewing your allocation each year, should keep you on track to achieving responsible long-term growth.
You can control your savings rate and investment strategy, and these two factors will eventually determine your retirement account balance. If you consistently do the little things the right way, you'll be happy with your assets in the future. Successful retirement plans are savings activities rather than asset goals.
If you aren't saving the right amount, you probably won't build enough assets to maintain your lifestyle in retirement. If you save and invest the right way, then the average account balance will be irrelevant.
Set goals based on personal circumstances
It can be informative to compare your retirement account to the average. However, it's ultimately a data point that can distract from more useful information. The savings rate is the most important variable in asset building, and it's not a specific number. Instead, it's expressed as a percentage of income, which varies from person to person.
That principle also applies to common account-value benchmarks for different ages. The amount that you should have set aside for retirement is almost always expressed as a multiple of your income. Financial planners often recommend that you have investments equal to 10 to 12 times your preretirement income to maintain your lifestyle after you stop working.
But the average amount saved isn't helpful for many people, because everyone's goals vary. Your 401(k) balance might be much higher than the median, but it might not be sufficient to meet your lifestyle goals if you're retiring soon. Alternatively, a young person's 401(k) might be much smaller, but they could still be well ahead of schedule if they have an excellent savings rate. They have decades to surpass the median retirement account value if they stay disciplined.
Focus on the important planning rules as they apply to your circumstances. Don't get distracted by other people's activities, which might not be relevant to your goals.
Track progress along the way
Make sure that you periodically check your performance relative to measurable goals. You should review your savings rate on a monthly or quarterly basis to make sure that you're hitting your milestones. If I fall short of my target savings rate, I need to revisit my budget and troubleshoot.
You should review your retirement account annually to confirm that the asset allocation is consistent with investment goals, risk tolerance, and time horizon. Modest periodic rebalancing might be necessary. Every few years, you can check your long-term average investment returns to ensure that things are progressing as expected.
To the extent that they match up with your personal goals, checking your progress against account-balance benchmarks based on your age might also be a good idea. If you're doing everything else well, you might comply with benchmarks. However, more diligence might be required if you're falling behind schedule. Note that account-value benchmarks are distinctly different from actual averages -- most Americans aren't saving enough for retirement, so you can't hope to find success by replicating the average performance. Most guidelines are more ambitious but more realistic about your long-term financial needs.
Your financial plan should include several measurable performance indicators. Take time to assess those indicators, so you can make confident and informed financial decisions that build toward your desired outcome.
