Not as Much as It Seems
How is your 401(k) doing? Fidelity Investment's Q1 2019 retirement analysis shows that many retirement funds are following a positive trend.
Ten years after the Dow Jones hit its lowest mark in the financial crisis, retirement balances have more than doubled in 401(k), IRA, and 403(b) accounts. Average balances in 401(k) and IRAs both topped $100,000. Just over 168,000 Americans have at least $1 million in their IRAs and 180,000 Americans have at least $1 million in their 401(k) account.
That sounds like a lot of money – but is it really? Could you live in retirement on $100,000, or even $1 million?
Should you contribute even more to your retirement funds while you can?
Heading in the Right Direction
Fidelity's Q1 data is promising for both employee and employer contributions. Average employee contributions for the quarter hit $2,370 – a 15% increase over Q1 2018 – while the average employer contribution increased by 6% to $1,780. Both values are record highs.
At that pace, an average employee with an average matching contribution would increase retirement funds by $16,600 in 2019. Extended over a forty-year career, that equals $664,000 in contributions – plus sizable earnings over forty years of stock market growth.
That's a simplistic example that ignores the ups and downs of the stock market, unplanned financial setbacks throughout your lifetime, and the poor odds of having an uninterrupted forty-year career that allows for significant regular retirement fund contributions. However, it does put today's average balance numbers in perspective.
Assuming twenty to thirty retirement years, average balances of just over $100,000 in IRAs and 401(k) accounts across all age groups suggest that many Americans have lots of contributions to make to ensure a comfortable retirement.
How Much Do I Need?
Successful retirement planning starts with retirement goals. If you don't know what you want to do when you retire, how can you know if you have enough money?
That's a difficult question for young Americans in the early stages of their careers, but it's a critical one. Contributions in the early years are far more valuable through the power of compounding and the inevitable growth of the stock market over time. You'll have other spending temptations in the early years, so a budget that includes contributions is critical to avoid starving your retirement funds.
Fidelity offers a rule of thumb to indecisive young investors. Your first target is to have the equivalent of a year's salary in a retirement account when you turn thirty (using your estimated salary at age thirty). Similarly, aim to have three times your salary in a retirement account by age forty, six times your salary at age fifty, eight times your salary at age sixty, and ten times your salary at age 67. If you plan to retire earlier, you'll need a larger multiplier.
Americans in their forties and fifties should have better estimates of ending salaries and retirement goals. During these years, review your retirement goals and estimate the corresponding expenses – and therefore how much income you'll need.
Start by assuming an annual income of 80% of your final salary throughout your retirement. Adjust upward if your plans involve buying a vacation home, extensive travel, or expensive hobbies. Assume the number of your retirement years, estimate your salary at retirement, and calculate your retirement savings needs. Now compare that to your contributions to date and other income sources like Social Security. Are you on track? If not, you still have time to adjust.
Boomers that are nearing retirement but running short can take advantage of catch-up contributions (an extra $6,000 for 401(k) plans and $1,000 for IRAs) – but at this point you may have to adjust your retirement plans to your situation. Map out a less expensive retirement plan or work longer.
It's easy for retirement contributions to take a back seat to daily expenses, especially when you are struggling to make ends meet. Workplace retirement programs allow you to divert part of your paycheck toward retirement savings before you have a chance to spend it.
For a comfortable retirement, we suggest saving as much money as you can as early as you can. Every dollar you invest in the early days has more time to grow tax-deferred. At the very least, you should contribute up to any matching level that your employer provides. Otherwise, you're turning down free money.
As you age, periodically re-evaluate retirement plans to accommodate your expected salary and retirement goals. Adjust your contributions appropriately and you'll have a smooth glide into retirement. Fail to adjust, and you'll find out the hard way how much of your retirement plans will be covered by Social Security. (Hint – not much.)
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