One of the most characteristic elements of the most recent recession in the United States, was the fact that many people saw their retirement accounts reduced by a significant amount. That lead to many people becoming afraid of saving for retirement, thus leading to a decrease in 401k contributions across the board!
People were fearful of any type of investing, after seeing the stock market drop over and over again. This lead to a bunch of irrational activity, such as people taking money out of retirement accounts (willing to pay taxes and penalties), and sticking everything in savings accounts.
Fortunately, it looks like we may see a reversal of that trend – even though it isn’t enough to save most people during their golden years.
401k Contributions Increasing
According to a Market Watch article…
The average 401(k) account balance hit $74,900 at the end of the first quarter, a 12% hike from a year ago, a 58% jump from the first quarter of 2009, and the highest level since Fidelity Investments first started tracking the data in 1998, according to the retirement-plan provider’s data…
This would seem to signal that people are beginning to think more rationally about funding their retirement. However, we must dig a little bit deeper in order to see if this is really true. Retirement account levels were so low a couple of years ago, that the increase in the average account balance could just be due to the increase in the overall stock market from that time!
According to Fidelity, “about two-thirds of the increase in account balances is due to market gains, and one-third is employer and employee contributions.” It could be that people are finally tired of throwing away free money – by not taking advantage of the 401k match provided by their employer – and are at least contributing up to the match maximum (usually set at 6%).
The article also stated that, “about 10% of plan participants increased their contribution rate in the first quarter — the largest percentage that did so since Fidelity started tracking that data in 2006.”
Those are decent numbers, but I would love to see many more people taking full advantage of the generous 401k contribution limits! Too many people are living as if they have some invisible safety net that will catch them if they fall into near-poverty in retirement. It would be wise for us to not simply rely on Social Security or some other government program to save us, nor can we always rely on our family members to be in a position to care for us when we are not able to work.
Many Not Prepared For Retirement
It would be one thing if people were ignorant of their lack of preparation for retirement, but that doesn’t seem to be the case:
Just 21% of workers surveyed said they are on track with their retirement savings, down from 37% in 2005, according to the annual Retirement Confidence Survey, conducted for the Employee Benefit Research Institute, a nonprofit, nonpartisan group.
If 79% of people surveyed feel as though they are not on track with their retirement savings, then I would expect much more than 10% of plan participants increasing their savings!
It seems like most people are either so focused on getting all they can for today, or they are so intimidated with the idea of investing (or basic math), that they fail to properly and adequately plan for retirement.
Even when I speak to clients (for financial consulting or taxes), they often have no idea of how much they will need, or they just make up an arbitrary figure. The results of the EBRI survey bear that out:
While 31% of workers said they need to save less than $250,000 for retirement, another 19% said their goal is $250,000 to $499,999, and another 22% said they need to save $500,000 to $999,999, according to EBRI. Seven percent said they need to save $1 million to $1.49 million, and 10% said they need $1.5 million or more.
But a lot of these figures are pure guesswork: 42% of workers surveyed said they guessed at how much money they need to see them through retirement.
This means that nearly half of the people surveyed were comfortable making up a figure, that would determine their standard of living for a period of 30 or more years! Almost a third of all workers said that they will need less than $250,000 for retirement?!?! Many of those people will be in for a rude awakening once they retire (well, at least they can get a tax break on their job hunting expenses)!
What Should You Do?
- Make sure you are taking full advantage of both 401k and IRA contribution limits
- Use a simple retirement calculator (you can find Excel templates, or ones online) to get a rough estimate of your retirement needs
- Talk to a financial adviser to come up with a more detailed plan
- Pay off debt (including your mortgage), so that you will only be responsible for your basic living expenses once you stop working
- Be realistic when setting goals and evaluating potential expenses
Seems to me that this would be the opportune time to get into the market. The whole idea behind investing is to buy low and sell high. There are deals to be had in solid companies right now.
I think that many people have difficulty preparing for the future that far in advance. I remember in college thinking that 40 years old was ancient. I wondered how I could possibly live that long. Now that I am past that age, I don’t think it is that old anymore at all. I also wonder where the leading edge of 401(k) investing is and how many years people have before actually needing those funds.
If the retirement vehicle started in 1980, there are 10 more years or so before the first retirees that would have had it for a working lifetime will have to retire. I am sure not all companies started offering one right away so I expect there might be another 20 years of saving in 401(k)s before those funds really are utilized.