Markets, Financial Planning, Retirement

When Saving For Retirement, It Pays To Be Persistent

2/3/17 8:00 AM

iStock-470251942.jpgNearly 77 million U.S. households had some type of formal, tax-advantaged retirement savings in 2016, according to new Investment Company Institute (ICI) data. For 27 percent of all households their retirement coverage was strictly employer-sponsored last year, i.e. current/expected defined benefit (DB) plan payments, or defined contribution (DC) plan balances. More than a third of U.S. households had individual retirement accounts (IRAs) in 2016, among which more than eight in ten also had employer-sponsored retirement plans.

That latter group of Americans will likely be the best prepared for a comfortable and financially secure retirement because they are making use of multiple tax-advantaged savings vehicles. This is especially true for those individuals who remain consistent participants in all of their retirement plans. Indeed, last fall we learned that ongoing participation in a 401(k) plan can generate significantly greater growth over time, and now another new study from the Employee Benefit Research Institute (EBRI) suggests that the same holds true for IRAs. Specifically, the average account balance among all IRA owners in the sample rose from $91,864 in 2010 to $127,583 in 2014, a solid 38.9 percent increase. However, the average balance for individuals who continuously owned IRAs lifted from $92,087 in 2010 to $134,244 in 2014, a 45.8 percent gain.

Those results should not be too surprising since growth in both 401(k) and IRA balances is ultimately driven by a combination of plan contributions and investment returns, and consistent participation in such plans therefore means a steadier stream of contributions as well as a higher likelihood of benefiting from rallies in the stock market. The latter is crucial because some of the best gains in equities can occur over very short time horizons, something that is evidenced by the performance of the S&P 500 in 2016. Indeed, the benchmark index rose by a healthy 9.54 percent last year but the bulk of this increase occurred in the weeks immediately following November’s Presidential election. Any investors who “sold in May and went away,” for instance, would not have benefited from the substantial year-end rally.

Continuous participation, though, can at times be understandably challenging, e.g. during periods of heightened stock market volatility or when unexpected money troubles force people to dip into their retirement assets early. This is why consulting with a professional financial advisor during such situations can help individuals determine all of their available options and ensure that the decision they make is optimal for both their near- and long-term financial well-being.



Sources: Investment Company Institute, Employee Benefit Research Institute

Post author: Charles Couch