Consistent participation in a tax-advantaged 401(k) plan can lead to substantial growth in your retirement nest egg. For example, an updated analysis by Fidelity Investments found that the average account balance for workers who have been utilizing their company’s 401(k) plan for fifteen consecutive years ended the first quarter of 2019 at $390,000, a 626 percent increase since 2004. Even during just the past ten years, the average account balance for consistent participants has risen by 466 percent to $297,700, including a 1,762 percent surge among Millennials.
Such figures highlight how confidence in the long-term resiliency of the stock market and a steady stream of savings have together helped many 401(k) participants not only survive but even thrive in periods of significant financial and economic uncertainty. Moreover, from 2004 through 2018 the benchmark S&P 500 index experienced an average intra-year drawdown of around 14.24 percent, whereas the largest peak to trough decline so far in 2019 is just 4.55 percent even after Monday's big selloff. Altogether, the clear power of persistent participation should be reassuring for many retirement investors given the recent uptick in volatility and potential for larger market swings in the months ahead. The report also adds to the evidence that although investment gains can generate rapid growth in retirement account balances, the strong economy perhaps plays a much bigger role in helping Americans achieve a comfortable and financially secure lifestyle in old age.
Indeed, rising incomes and a greater number of jobs that provide access to 401(k) plans and accompanying matching contributions are welcome side-effects of a tightening labor market, and workers appear more than willing to take advantage of this favorable environment. The total savings rate (employee contributions + company match) among all 401(k) participants in Fidelity’s sample, for instance, climbed to an average of 13.5 percent in Q1, an all-time high. IRA contributions have also been increasing, and average balances for participants in both these plans and 401(k)s rose to a record level in the first quarter. Further, the number of 401(k) participants with $1 million or more in their account increased to 180,000 in Q1, and the number of IRA owners with at least a million dollars rose to 168,100. Those totals represent a sharp rebound from Q4 2018, and below are a few of the actions Fidelity recommends for others hoping to join the millionaire club:
- Build an emergency fund: Having 3-6 months’ salary stashed away in case of an emergency can help people avoid taking loans and withdrawals from their retirement nest egg.
- Create an investment strategy: Determine if you can take charge of investing your savings on your own. If you can’t or prefer not to, leverage a Target Date Fund or Managed Account.
- Think about healthcare: If available, consider enrolling in a Health Savings Account, which can help you save for current and future medical expenses.
- Don’t cash out: When changing jobs, resist any urge to cash-out or take distributions as they diminish the power of long-term saving.
Sources: Fidelity Investments
Post author: Charles Couch
*Original publish date 05/14/2019