401(k) Balances Are Growing But They Are Not Nearly High Enough

There's good news and bad news on the 401(k) front these days.

The good news is that average 401(k) balances are at all time highs.

The bad news is that average 401(k) balances aren't nearly high enough.

Market gains drive 401(k) balances sharply higher is subtitled 'Average balance hits 12-year high, but insecurity looms:

"Investment gains helped propel the average 401(k) balance to a 12-year high at the end of the third quarter, according to data from Fidelity Investments, even as another study of retirement security showed a spike in the percentage of people who are financially unprepared to retire.

The average 401(k) balance jumped to $75,900 at the end of the third quarter, up 18% from $64,300 a year ago and the highest average balance since Fidelity Investments started tracking the data 12 years ago, according to an analysis by Fidelity of the 12 million 401(k) accounts it manages in 20,200 company plans.

About 74% of the gain was due to market forces, and 26% was from savers’ contributions and company matches, said Beth McHugh, vice president of market insights for Fidelity Investments.

As retirement savings go, that average account balance is starkly insufficient, but the figure includes young workers who recently started saving, as well as people who only recently joined a Fidelity-managed workplace plan.

The average account balance was higher for older workers who have stashed savings in a Fidelity plan consistently for 10 years—about $228,000 for continuous savers aged 65 to 69 years old, and $250,000 for those aged 55 to 59 years old.

Still, even those higher figures are worrisomely low. For its part, Fidelity recommends workers save eight times their salary. Read more: Retirement savings: How much is enough?

Other surveys point to the dangers ahead. Fully 53% of U.S. households in 2010 were at risk of being unable to maintain their pre-retirement standard of living in retirement, a nine percentage point hike from 44% in 2007, according to the National Retirement Risk Index from Boston College’s Center for Retirement Research.

That study is based on data from 2010. More recent market gains might improve those findings (though the 312-point drop in the Dow Industrials the day after the election isn’t going to help.

Still, a recent survey of more than 32,000 workers world-wide by consulting firm Towers Watson asked workers to make some hypothetical trade-offs, and found that workers are eager for some help.

About 40% of respondents “would trade a smaller salary increase or bonus for a guaranteed retirement benefit that doesn’t rise or fall with the market,” the report said.

For U.S. workers, 49% said they were willing to trade “nearly anything for guaranteed retirement benefits, even paid time off and future career advancement opportunities,” the report said.

About 46% of employees said they’re comfortable about being able to manage their money to provide for their retirement needs, and 34% said they feel comfortable about being able to manage their health-care needs in retirement.

 

Ramp up savings

For starters, workers might want to try increasing their savings rate, if they can.

The average contribution rate for people who were automatically enrolled into a workplace savings plan was 3.7%, according to the Fidelity study.

In plans that don’t use automatic enrollment, new participants had an average savings rate of 8.4%.

Ideally, workers should save at least 10% to 15% for retirement."

SUMMING UP

One good thing is that people are now aware that they need more savings at retirement to maintain their pre-retirement lifestyle. 

{NOTE: Only 30% of baby boomers began saving between the ages of 25-34. In comparison, 51% people in today's 29-44 age group began saving between the ages of 25-34. We're making real progress, albeit slowly and as a result of the painful learning experiences of the past.}

One not-so-good thing, however, is that people generally still don't save enough. Not nearly enough.

And if we don't save enough, we won't have enough down the road, regardless of how we invest those savings.

Accordingly, the best advice is as follows:  

First, begin saving early and/or plan to retire late. The length of time from when we begin to save and invest until withdrawals begin is the most important factor when providing for a comfortable retirement.

Second, save as much of a percentage of your earnings as possible at the beginning, and never reduce that percentage over time. Increasing it is great, but don't reduce it. That way, periodic wage and salary increases will translate automatically into increased savings.

Third, decide at the outset to own risk assets for the long haul, aka stocks.

Fourth, don't get bogged down by paying financial intermediaries, aka financial advisers and brokers, a portion of your investment returns each year. DIY is the best approach.

Fifth, achieve a level of basic financial literacy so you won't get scared out of the market when it falls from time to time.

Thanks. Bob.