Saturday, February 16, 2013

401(k) Balances ... Good and Bad News

401(k) balances reached all time record highs in 2012. That's the good news.

However, the average amount in those individual accounts is distressingly small and unable to provide to any comfortable retirement income security for the vast majority of people. That's the bad news.

How much is enough? Well, we'll save that discussion for another post, but at least eight times the individual's final annual salary is recommended as sufficient at the retirement age of 67. That's simply not what people have done or are on track to do currently, and it's important that we get the message out as quickly as we can to those who still have enough time to get an adequate individual retirement savings and investing program in place.

Here's the sad truth --- most of us didn't begin saving early enough and didn't save enough when we did start saving. And we didn't invest what we did save properly.

So when we began to reach normal retirement age, we saved more but by then it was pretty much too late, although it's always better to be late than never.

401(k) balances hit record highs has the details:

"A combination of investment gains and worker contributions helped push the average amount stashed in a 401(k) to its highest level ever by the end of 2012, according to the latest Fidelity Investments analysis of the retirement-savings plans it manages.

But the average, while 12% higher than a year earlier, totals just $77,300, according to Fidelity’s data, which covers 12 million participants. That is a fairly dismal sign that there are some difficult retirement years ahead for many savers.

Still, that overall average balance counts savers young and old, so presumably many of those people have years of contributions ahead of them.

Meanwhile, for workers aged 55 and over, the average balance is $143,300. Not so great, but there is a chance these savers have other workplace plans or IRAs not covered by Fidelity’s data.

The numbers look a bit better for workers 55 and over who have continuously contributed to the same plan for 10 years: Their average account balance is $243,800. Read: Retirement savings: How much is enough?

For a growing portion of people, their retirement plan is to work longer. A separate study found that 62% of workers aged 45 to 60 plan to delay retirement. That’s up from 42% in 2010 . . . .

Savings rates rise with age

Not surprisingly, older workers manage to set more aside each paycheck than their younger co-workers.

Among older workers, 401(k) contribution rates averaged 11.4% for workers aged 65 to 69, 10.6% for those aged 60 to 64, and 10% for those aged 55 to 59. If you add in their employer match, the average savings rate for each of those groups was: 14.9%, 14.2% and 13.6%, respectively, according to Fidelity.

Contribution rates are substantially lower among younger savers. Workers aged 20 to 24 saved 5.4% of their salary on average, those aged 25 to 29 saved 5.9%, and those aged 30 to 34 saved 6.5%. With the employer match included, those figures jump to 8.1%, 9.1% and 9.7%.

Workers aged 35 to 39 saved 7.2% on average (10.4% with the employer match). Those aged 40 to 44 saved 7.6% (10.9% with the match). Those aged 45 to 49 saved 8% on average (11.4% with the match). Those aged 50 to 54 saved 9.2% on average (12.7% with match)."

Summing Up

We don't save enough for retirement, and we don't begin to save early enough in our careers.

One great habit is to begin to save and invest at least 10% of pre-tax earnings at the earliest possible time. If a company match is available, that increases the amount saved and invested even more.

Thus, the secret to having retirement income security is that there is no secret. Save and invest as much as possible as early as possible. And keep it up until retirement.

It's also a great idea to invest in a low cost passively managed S&P 500 Equity Index Fund. That way we get whatever the market returns over time and don't have to deduct a significant piece of those earnings to go into the pocket of a 'professional' money manager.

We also get used to periodic ups and downs of the market without panicking and by establishing the habit of dollar cost averaging. By investing the same percentage amount each pay period, when our pay increases our dollar contributions will automatically increase as well.

As a result, we won't miss being able to spend that which we never had available to spend, so starting the process early doesn't "deprive" us of anything.

Then when we become oldsters, we'll be financially happy campers, workers, retirees or whatever else we choose to do in our leisure or extended working years.

That's my take.

Thanks. Bob.

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