Dear Financial Community,
Please, for the love of God, stop pointing out the average 401k balance by age. Without fail this is a number that looks and sounds extremely low, especially for older folks, and it’s usually in an effort to show how easy it would be to catch or outpace that number. You all consistently leave out some pretty big, pretty obvious facts that need to be included to make these numbers make any kind of sense.
First, and most obviously, people change jobs. When people change jobs they are presented with multiple options for their existing 401k. One is to cash it out, and literally no one recommends this. One is to roll it over into the new 401k, which is an acceptable option, but you in the financial community know better. The last is to roll a 401k into a traditional IRA where people will have the most control over their finances and the most options for investment. You know this very well, Financial Writers, because you recommend this more than any other option. And what, then, happens to these people’s 401k balances? They drop to ZERO! I can see your headlines now “Most people who change jobs have zero dollars in their 401k’s.”
Next, there is a fair amount of the population who somehow still has a pension. These are your cops, teachers, nurses, state workers, federal workers, union workers, etc. I don’t care to look up the numbers, but this is a significant portion of the population. And a great many of them don’t use 401k’s, or 403b’s or 427’s, or the like, and fully rely on their pensions and Social Security for better or for worse. This is a generalization, but a simple “this excludes pension workers” would suffice.
Although I’m sure there are a great many other reasons 401k balances may be lower than expected, the last one I’ll cite should be very familiar to especially the Financial blogging community. Roth IRA conversions. Although Roth IRA conversions aren’t for everyone, a statistically significant portion of the population participates in them. And what happens when people convert their 401k to a Roth IRA? The 401k balance goes down! What’s more, the majority of the population participating in this behavior are formerly high income, late in career or retired workers.
None of this is ever even hinted at when you folks cite 401k balances. Yes, you’re speaking to the data, but you’re not even remotely considering why that data may be that way. Clearly I cited no concrete data here myself, but common sense brings all of these points into the conversation. It’s foolish to continually regurgitate these numbers as fact without ever including any reasons why things appear to be the way they are.
I’ll stop ranting now. Hopefully anyone reading this will consider these points the next time they see one of these stock articles.
Thanks a million,
JB
Freed by 50 