Good news: The markets are at new highs. So, we can all retire early, right?
It’s true the value of retirement funds has risen as the market has soared: Fidelity and Vanguard have recently reported that the value of the average retirement fund has risen in the last year.
But the results are still well short of the savings many of us will need for a happy retirement.
Fidelity recently reported that the average 401(k) in its system had assets of $104,000 in the second quarter, a 1 percent increase from the first quarter and a 6 percent increase from one year ago. The average individual retirement account balance was $106,900, almost a 2 percent increase from the first quarter and nearly 7 percent higher than the second quarter of 2017.
There are some encouraging signs.
Automatic enrollment in retirement accounts is helping investors save more. As of the end of the second quarter, 33 percent of Fidelity’s 22,600 401(k) plans auto enrolled new employees, more than double the percentage (15 percent) that did so in 2008. Bigger companies have an even higher success rate.
Employees who are automatically enrolled reap several benefits. They tend to save more. Since 2008, the average savings rate among employees who were automatically enrolled in their 401(k) has increased from 4 percent to 6.7 percent, according to Fidelity. These employees also tend to stay in their plans longer.
But, we still are not saving nearly enough.
Vanguard said last year that 94 million Americans were covered by defined contribution accounts, most of it in 401(k)s. Assets are in excess of $7 trillion. When you really examine the details, however, the account size per person is not very large.
At Vanguard, the average 401(k) account value for an investor age 65 and older is $209,984. This sounds like a pretty good number, and it is, but there’s a problem. That number is pulled higher by a smaller number of “super savers” and high income earners.
The median balance among the age group, where half have more and half have less, is a measly $64,811. Average that out over 20 years — most Americans should expect to live into their 80s — and that is not a lot to pull out on a yearly basis; perhaps a little more than $3,000.
Some lucky Americans have more than one retirement plan, because they may have had multiple employers. Their picture is brighter than the example above, but it doesn’t change the overall picture too much.
Part of the low savings rate can be explained by the fact that enrollments in 401(k) plans have increased in recent years, which means that those new accounts have relatively small balances. But often it’s because many participants still don’t contribute the full amount they are allowed to contribute, and many lack the proper planning skills to make retirement decisions.
When faced with a complex choice of making a retirement investment, many still decide to opt into the “no decision” mode and don’t sign up at all. Only 72 percent of eligible employees are enrolled in their employer’s voluntary savings program, according to Vanguard.
Given that most employees provide a matching contribution, that is like passing up on free money.
What can be done?
More automatic enrollment in retirement accounts. Vanguard, in its annual report entitled “How America Saves 2018,” noted that plans with automatic enrollment have a 92 percent participation rate, compared with a participation rate of just 57 percent for plans with voluntary enrollment.
“Our challenge is to encourage more individuals to take advantage of these workplace savings plans,” said Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of “How America Saves.” “Plan sponsors can help their employees move the dial even further by defaulting at higher savings rates, and implementing annual increases.”
In addition, Americans should strive to contribute a total 12 percent to 15 percent of their salaries, including employer contributions. Employees should always strive to meet the company match instead of leaving free money on the table.
Savings can also be boosted by lower fees. Go for the highest quality fund that meets your objectives and charges the lowest fees. Even a fraction of a percent in higher fees, when compounded over decades, can cost thousands of dollars more.
Finally, if it sounds like I am obsessed with how to get the retirement savings rate up, it’s with good reason. The other two “legs” of the retirement “stool,” Social Security and pensions, are increasingly under pressure.
As of January 2017, the average retiree receives $1,360 a month from Social Security. That’s $16,320 a year. About one-third of adults over 65 also collects a pension, but it’s not a large amount of money. The median private pension was only $9,376 a year, according to the Pension Rights Center (state, local and federal pensions were higher).
And those are the lucky ones. Anyone looking to collect more is going to need to rely on their personal savings. That gets me back to the 401(k) and IRAs. That 65-year-old with a median $64,811 in his 401(k) would pull out a little more than $3,000 a year assuming he or she will live at least 20 years more.
So let’s do the math:
Social Security $16,320
For many, this may be sufficient. If you own your home, have low expenses, and live in a relatively low-cost part of the country, you may be able to get by. But for many, $28,696 is not much to live on yearly.
And remember, these are the luckier ones. The key to improving retirement savings is to get that personal retirement figure a lot higher.
Which begs the question, how much is enough in a retirement account? Fidelity has provided some useful rules of thumb, assuming you want to have a lifestyle in retirement that at least gets close to your lifestyle while you were working. Fidelity recommends you have your annual salary saved at age 30. At 50, six times, and at 67, 10 times.
That means if you make $50,000 a year, you should have $500,000 saved by the time you are 67.
(multiple of salary)
So, the message is: Start saving.