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.
