Earlier today, CNBC posted a report with the above title on their website. The article referenced a new report of Fidelity Investments that claimed that 401(k) and IRA balances hit record highs in the first quarter of 2015, with the average balance now standing at $91,800. Now, the article doesn't exactly identify what constitutes the "average", whether this is intended to be the median balance of accounts at Fidelity or just the simple arithmetic mean. Either way, it doesn't quite square with other research, including data of the Federal Reserve.
Tracking just how much individuals have saved in IRA and 401k accounts is tricky business, due to the various measures used to report the data. Many sources, including brokerage firms and mutual fund companies report their data as a simple arithmetic mean: they add up the total balances in all IRA and 401k accounts they manage and divide by the number of people holding those accounts. Thus, the estimated $102 million that Mitt Romney is believed to hold in his IRA is averaged in with the $15,000 of the average middle class household. It’s just not a meaningful number.
No slight to Mr. Romney’s contribution to America’s retirement savings, but for the data to be reported in a way that is of any value in understanding the current retirement crisis, the “average” balance needs to be calculated on the basis of the median. To do this, of course, you simply line up all the account balances at a place like Fidelity from smallest to largest, and find the account in the precise middle by value, with exactly fifty percent of accounts holding greater balances and fifty percent holding lesser. This would only tell you, of course, what the average balance is of investors who hold accounts at Fidelity (and, therefore, not representative of the average American) but it’s certainly more realistic than reporting an arithmetic mean.
While the median value of retirement assets has risen in recent years, according to recent data of the Federal Reserve Bank the portion of respondents who even owned a retirement account of any sort fell to less than half, continuing a downward trend that began in 2007. For those who are fortunate enough to have a 401k account, even with recent record gains in stock prices, the median balance of 401k/IRA accounts was just $59,000 at the end of 2013. At a four percent recommended annual spending rate in retirement, an account of this size would produce (pre-tax) retirement income of less than $200 per month, or less than the average American family spends on groceries each week.