At a time of the disappearing pension, the 401(k) is for most workers the main source of old age security. Almost any financial planner will be on you to start putting away as much as possible early and resist temptation to take anything out prematurely (even if a recently-signed retirement bill will soon waive the 10% penaltyfor those who need to withdraw $1,000 a year due to economic hardship.)
But while saving is always better than not saving, one's financial situation also hinges heavily on the economy at the exact moment one needs to start tapping into those funds. According to the latest data released by Fidelity Investments, 2022 was so turbulent that the number of people with over $1 million in its accounts dropped by 32% from 442,000 in 2021 to299,000 in 2021.
While so-called "401(k) millionaires" make up only 1.4% of the 21.5 million people with Fidelity accounts, the average value of a Fidelity plan dropped by 20.5% as theS&P 500 (^IN) tumbled 19.4% in 2022 amid a year of everything from war, energy uncertainty and widespread inflation.
Here's Why The Number Of 401(k) Millionaires Dropped So Dramatically
An earlier report from Vanguard found the same 20% drop for accounts held with the other investing giant. The average Vanguard balance was$112,572 while the median uninfluenced by the top and bottom one percent of savers was just$27,376 and a 23% decrease from 2021.
At Fidelity, the average account balance in 2022 was$103,900. The442,000 millionaire mark in 2021 was a peak since the first 401(k) plan was first established in 1978 but the year that followed was a very uncertain one and so many people saw significant drops to their accounts.
The number ofindividual retirement account (IRA) millionaires also dropped by 25% to 280,320 in 2022.
People for whom retiring is still a very distant concept will largely be unaffected by these ups-and-downs -- over the course of 20 years, an average portfolio with 60% invested in stocks and 40% in bonds generates between5% to 8% annually even if that number is higher in sound years and lower in economically turbulent news.
Despite Turbulent 2022, People Are Still Stowing Money Away At Record Rates
Amid inflation, having more stowed away is always a good strategy -- an annual study byNorthwestern Mutual estimated that the average retiree now needs$1.25 million to retire comfortably next year.
Seeing the state of things, most savers understand this pressure and respond by stowing away more. The Vanguard survey found that almostfour out of every 10 savers increased their deferral rate in 2022 while97% of those below retirement age did not make any early withdrawals.
This last number is just a slight bump of those withdrawing prematurely due to economic hardship -- from2.1% in 2021 to 2.8% in 2022. The numbers of holders withbroadly diversified portfolios also rose to 79% by the end of 2022 as many moved savings around to ensure that they did not have too many eggs in one basket in the case of economic uncertainty.
"The hope is that [savers] continue to stay on track and, as market conditions improve, more retirement savers should rise above that millionaire threshold,"Mike Shamrell, Fidelity's VP of workplace thought leadership, told the Washington Post.
It isn't directly managed by you, and you are limited to what you can invest in. You also do not have immediate access to your money without paying fees. There is also no insurance on 401(k) plans, meaning your retirement account is toast in the event of a market crash.
The average age of the 401(k) millionaires is 59, but their wealth accumulation isn't just a function of time — it also stems from good investing practices.
Fidelity also reported that the number of 401(k) accounts with balances of at least $1 million rose in the fourth quarter by 20%, to 422,000 accounts; and by 41% for the whole year.
“If you study wealthy people, they are not focused on 401(k) [plans] and IRAs,” he told GOBankingRates. “People have gotten wealthy selling 401(k) plans and IRAs — Vanguard and Fidelity have made a lot of money managing people's retirement [savings].”
I recommend the Roth option. If your plan doesn't have a Roth option, your strategy should be to contribute just enough to the traditional 401(k) to qualify for the maximum matching contribution. Then do more retirement saving in a Roth IRA.
By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary. So, for example, if you're earning $75,000 per year, you should have $750,000 saved.
Fidelity says by age 60 you should have eight times your current salary saved up. So, if you're earning $100,000 by then, your 401(k) balance should be $800,000.
How to get your retirement savings on track. Despite feeling behind, many Americans have good money habits when it comes to saving for retirement. While only 11% report maxing out their 401(k) contributions, 46% of people say they're contributing as much as they can afford, CNBC's Your Money survey found.
All told, there were 422,000 retirement savers in Fidelity 401(k) plans sporting balances of seven figures and beyond as of Dec. 31, up from 349,000 at the end of September and 299,000 at the end of 2022.
If you plan to rely on your 401(k) during retirement, you might consider contributing the maximum annual amount, which is $23,000 or $30,500 (aged 50 and over) in 2024. Not only would this build your retirement fund more quickly, but you could also benefit from tax perks and employer matches.
According to Schwab's 2023 Modern Wealth Survey, Americans perceive an average net worth of $2.2 million as wealthy. Knight Frank's research indicates that a net worth of $4.4 million is required to be in the top 1% in America, a figure much higher than in countries like Japan, the U.K. and Australia.
If you want the best possible selection of investments, then an IRA – especially at an online brokerage – will offer you the most options. You'll have the full suite of assets on offer at the institution: stocks, bonds, CDs, mutual funds, ETFs and more.
You can make one withdrawal of $1,000 per year to cover a personal or emergency expense without paying the 10% penalty. However, if you borrow from the account, you'll usually have to pay the amount back plus interest within five years.
There are more than a few reasons that 401(k)s are a bad idea, including that you give up control of your money, have extremely limited investment options, can't access your funds until you're 59.5 or older, are not paid income distributions on your investments, and don't benefit from them during the most expensive ...
If you earn, say, $50,000 per year, then stashing more than 40% of your salary into a 401(k) will almost certainly not make sense. Also, your company's 401(k) plan may be too costly with a poor investment lineup.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
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