If you read Fidelity Investments’ latest “Retirement Analysis” report, you’d think that the average American is doing OK when it comes to retirement savings.
Yet if you look at rival Vanguard Group’s annual “How America Saves” report, you might reach a different conclusion, even though it is analyzing similar data in 401(k) accounts.
What gives? Shouldn’t the median, which is the midpoint between the largest and smallest accounts, be close to the average? The truth is the average account size, though it is often cited as an indicator of overall investor health, is misleading.
“Anyone well-versed in statistics…would tell you that when a population’s average exceeds its median by an order of magnitude, as in the Vanguard study on retirement account size, that you’re dealing with positive skew,” says Paul Winter, a financial planner at Five Seasons Financial Planning in Salt Lake City. Positive skew in this case, he adds, is when a relatively small number of large accounts pull up the average account size but leave the median relatively unaffected.
By way of example, Winter points to Amazon.com founder Jeff Bezos, one of the world’s richest men. “Bezos and any 99 retirement savers with no IRAs or 401(k)s are billionaires in terms of net worth,” he says, because Bezos’ reported wealth alone tops $100 billion. “Is that statement really telling us anything about the retirement readiness of those 100 people as a group, or is one observation distorting the average and damaging the conclusion?”
While the median is a more accurate representation of investors’ retirement health, it also has flaws.
“With job changes come new 401(k)s and, unless rolled over, it’s not uncommon to find a 30-something-year-old with three 401(k)s with about $50,000 each,” Sheahen says. “With many small balances on a by-account basis, it’s no surprise that the median balances can appear so low.”
Many advisors express frustration with both statistics. “People in the investment/financial industry often throw around client and historical market data using averages in a very misleading manner,” says Deva Panambur, a financial planner at Sarsi in New York. “They should learn from the story of the 6-foot statistician who died trying to cross a river with an average depth of 5 feet.”
Neither median nor average takes into account the fact that people often have substantial assets outside their retirement accounts while many have no retirement account savings at all. Until such data are factored into the mix, such reports on retirement savings will remain inaccurate about what it means to be an “average American.”