You're probably not putting enough money in your IRA

Pedro Ribeiro Simões/Flickr

The United States is global economic behemoth, but one aspect we're clearly nowhere near the best is with regard to how much Americans put away for retirement. The April data from the St. Louis Federal Reserve shows that personal savings rate in the U.S. is a paltry 5.4%. That figure is up substantially from pre-Great Recession levels, but it puts us well behind developed nations such as France and Germany, whose citizens save a much higher percentage of their personal income.

Low personal savings rates can lead to big issues come retirement. Having not saved enough for retirement, some Americans could be forced to lean heavily on Social Security, which is a program that has problems of its own. Insufficient savings could also coerce people to delay their retirement and work longer than expected. Doing so would give them more opportunity to save, as well as allow their Social Security benefit to grow.

How Americans are attempting to do more with less

But at the heart of the matter is the idea that Americans need to really maximize the growth potential of the dollars they're saving. This means combining solid long-term investments with tax-deferred or tax-free accounts that can aid with wealth creation.

One of the most popular tools that allows for wealth creation, as well as tax advantages, is the Individual Retirement Account, or IRA. There are two main types of IRAs available to the public — Traditional and Roth — and they both allow a maximum contribution of $5,500 for those aged 49 and under, and $6,500 for people ages 50 and up, as of 2016. These contribution limits tend to rise every few years with inflation.

A Traditional IRA allows consumers the ability to write off their contributions up front; however, they're responsible for paying federal income taxes once they begin making withdrawals between ages 59 1/2 and 70 1/2. There are no income limitations to contribute to a Traditional IRA (although tax-deductible limitations exist based on income), but there are minimum required distributions.

A Roth IRA, which I've dubbed America's greatest retirement tool, provides no upfront tax deductions, but your money is allowed to grow without taxation throughout the life of the account as long as no unqualified withdrawals are made. There are income limitations as to who can contribute, but they tend to exclude only around 10% of the population who happens to be well off, so this is a retirement tool geared toward lower-, middle-, and upper-middle-class Americans. Additionally, there are no minimum required distributions, meaning your money is free to grow for as long as you like, and you can even continue making contributions past the year you turn 70, unlike a Traditional IRA.

So how much do Americans keep in their IRAs? Let's take a look at a breakdown by age, courtesy of the Employee Benefit Research Institute (EBRI).

Here's how much money the average American has in an IRA

Released in May 2015, the EBRI examined 25.8 million IRA accounts owned by 20.6 million unique individuals. Combined, these accounts contained $2.46 trillion worth of assets. The data compiled is through year-end 2013. Based on EBRI's research, more individuals held a Traditional IRA instead of a Roth, more than likely on account of a rollover from a 401(k) or other tax-deferred asset.

So how much does the average American have in his or her IRA?

 Pedro Ribeiro Simões/Flickr

The average IRA balance tends to increase as time passes, which is what we'd expect. There's an odd divergence in that people under 25 have more in their IRA, on average, than those between the ages of 25 to 29, but I believe this can be explained by the steep dive of the U.S. stock markets during the Great Recession, and new workers being too skeptical to invest in the stock market roughly eight years prior. If workers under 25 are getting an earlier start, it would explain this divergence.

Aside from this lone anomaly, we see pretty well-defined growth in average IRA balances as age increases. Pre-retirees generally have well over $100,000 in their IRA, while Americans in the 65-69 age range have over $212,000.

Americans need to do better

EBRI's data is both encouraging and disappointing. It's encouraging to see other channels of income being used for retirement such that Social Security isn't too heavily relied upon. Conversely, though, it's also disappointing to see average account balance as low as they are considering the benefits of a Roth or Traditional IRA.

Using Bankrate's investment calculator, a $5,500 max contribution over 45 years (assuming from age 20 to 65, and not even taking into account the catch-up contribution of $1,000 for people aged 50 and up) at an average rate of return of 7%, which is the long-term return rate for the stock market, would net $1.57 million by age 65. Understandably these are "ideal" scenarios, because the market's average return may fluctuate moving forward. However, $1.57 million is a far cry from the $212,812 the average 65- to 69-year-old had in his or her IRA in 2013. What this implies is workers aren't maxing out their contributions on an annual basis.

Pedro Ribeiro Simões/Flickr

What's even more frustrating about this potential implication is that contributions can be made retroactively to an IRA up to Tax Day of the following year. In other words, if you want to max out your $5,500 contribution to an IRA for 2016, you have until April 15, 2017, to add money to your account. This is the U.S. government's way of enticing Americans to save early and often.

Clearly, Americans aren't putting enough in their IRAs because too few understand their cash flow. In 2013, Gallup found that just 32% of U.S. households kept a detailed monthly budget. Without a budget it's incredibly difficult to get a good bead on your cash flow, which makes optimally saving for retirement nearly impossible. Without a budget there's no accountability for your spending actions, and thus little way to truly "save more."

If more Americans were to use budgeting software, we'd probably see a healthy increase in average IRA balances in the future. Of course, we also need consumers to take steps that allow their progress to be easily measured, as well as make goals that keep them accountable. One of the smartest things you can do is set up a recurring weekly or monthly withdrawal from your checking or savings account to an investment account so as to keep your budget on track and hold yourself accountable.

My hope is we'll see these numbers grow considerably as the U.S. economy marches higher and consumer trust in the stock market returns.

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