Fidelity announced with great fanfare in mid-February that the average 401(k) balance hit a record high of $77,300 by the end of 2012.  It is good news that balances are up from a year earlier, but $77,300 does not indicate success in retirement saving.  There is nothing encouraging about this number.

For most private sector workers, their 401(k) will be their only supplement to Social Security.  Social Security benefits will be less generous in the future than in the past even under current law.  Four things are happening.  First, as the full retirement age moves from 65 to 67, the benefit at 65 is declining.  Second, rapidly rising Medicare premiums are deducted from the check before it goes in the mail.  Third, benefits for the typical worker will eventually be taxed under the personal income tax.  Fourth, couples get lower benefits relative to their pre-retirement earnings than they used to, as working wives increasingly receive benefits based on their own earnings instead of the 50-percent spouse’s benefit.  Again, all of these reductions occur under current law.

In addition, Social Security faces a deficit over the next 75 years, and the time is coming when Congress will be forced to decide the role that tax increases and benefits cuts should play in restoring balance.  

Benefit cuts will almost certainly be part of any solvency package.  So, the message is that people will get much less from Social Security relative to their pre-retirement earnings going forward.

The only real supplement for most private sector workers will be their 401(k) plan.  A balance of $77,300 would produce a monthly income of about $360.  That’s an alarmingly small amount.  Combine that with diminished Social Security benefits and most American households are going to face hard times once they stop working.

-Alicia H. Munnell - MarketWatch.com