There was some great news announced last week by Fidelity Investments which reviewed over 17 million retirement accounts it holds in custody. I’ll give you the good news just below. However, Government Accounting Office reports that nearly half (48%) of Americans age 55 and older have no retirement savings at all. Let’s get to the good news first.
The average 401(k) balance rose 17% last year to $112,300 compared to the end of 2018, according to Fidelity. The average individual retirement account, or IRA, balance rose the same 17% to $115,400. Both are new records – that’s great!
Surging markets around the world were a big reason for the growth: The S&P 500 Index had one of its best years in decades with a 31.5% return in 2019. Investments of almost all types logged gains last year, from stocks to bonds to emerging markets.
The best news is that workers’ savings rates improved significantly. Fidelity said the average worker set aside 8.9% of their pay in their 401(k) in the 4Q of last year, a record. Combined with employer matches, the average total savings rate was 13.5% in the quarter, matching its record last reached in the spring of 2019.
“Nobody can control the market, so the behaviors of people contributing to their 401(k)s are what get us the most excited,” said Katie Taylor, vice president of thought leadership at Fidelity. “We have people saving 13.5%, which is really close to the 15% that we recommend. That’s a great story.”
In many cases, workers may not even realize they’re saving more. Most employers give the option for workers to automatically increase their contributions each year, without having to do anything. Some employers even automatically sign up their employees for these auto-escalation programs, requiring them to opt out if they don’t want their contribution levels to steadily rise.
Such features are on top of programs where employers automatically enroll new hires in their 401(k) plans. They all lean on the power of inertia to help workers build up bigger nest eggs. It’s a sharp turnaround from earlier years when workers had to take extra steps to join the 401(k) plan and fill out paperwork whenever they wanted their contribution levels to change.
“There’s always a way, if you don’t want to do it, where you can unenroll, but these automatic programs have been a game changer,” Taylor said.
Consistent contributions – and letting them grow over time – are keys to building bigger retirement portfolios. Among workers who have been in their 401(k) plan for 10 straight years, the average balance rose to a record $328,200 last year, according to Fidelity.
I should note that figures such as those quoted above count only people who have a 401(k). Many lower-income workers, particularly at smaller businesses, could not save in a 401(k) even if they wanted to because their companies don’t offer such plans. Fortunately, legislation passed late last year aims to make it easier for smaller employers to band together and offer retirement plans – the so-called SECURE ACT. I wrote about it in detail on January 30.
Now for the really bad news: Nearly half (48%) of all Americans aged 55 and over had no retirement savings at all, according to the latest estimates from the US Government Accountability Office (GAO). That is very sad since these people have nothing to support them in retirement except Social Security and will have to continue working beyond their expected retirement age.
Retirement experts have long warned about an impending financial shortfall for millions of older Americans, as many employers have phased out pensions. This shift has forced more and more Americans to prolong their working years or rely on their savings and Social Security benefits, or both.
Individual retirement accounts (IRAs) and work-based 401(k) savings plans have helped compensate for the erosion of pensions. But many Americans have not taken advantage of these newer ways to save or lack the resources to do so.
Senator Bernie Sanders (I-VT.) says that Social Security should be expanded to help those with little or no savings. “At a time when half of older Americans over the age of 55 have no retirement savings, our job is to expand Social Security to make sure that everyone in this country can retire with the dignity they have earned…” he tweeted last month.
I couldn’t disagree with his position on Social Security more. For one, his SS plan would cost the government tens of trillions of dollars as many studies have shown – at a time when we’re already running trillion-dollar budget deficits. For two, if someone has worked their entire career and hasn’t put anything away for retirement, have they really “earned” a government bailout? Socialists like Mr. Sanders believe the answer is yes.
I’ll have more to say about this between now and the election. Adios for today.
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