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In a year marked by stiff economic headwinds, retirement savers paid the price.
Although the average 401(k) balance rose in the fourth quarter of last year, balances ended 2022 down 23% from a year earlier to $103,900, according to a new report by Fidelity Investments, the nation's largest provider of 401(k) plans. The financial services firm handles more than 35 million retirement accounts in total.
The average individual retirement account balance also plunged 20% year over year to $104,000 in the fourth quarter of 2022.
"Given all the stresses in the world today, such as natural disasters and geo-political events, Americans continue to confront challenging times in our economy," Kevin Barry, president of workplace investing at Fidelity, said in a statement Thursday.
Still, the majority of retirement savers continue to contribute, Fidelity found. The average 401(k) contribution rate, including employer and employee contributions, mostly held steady at 13.7%, just below Fidelity's suggested savings rate of 15%.
And despite the ongoing inflationary pressure straining most households, only 16.7% of plan participants had a loan outstanding from their 401(k) at the end of the year, Fidelity said.
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Federal law allows workers to borrow up to 50% of their account balance, or $50,000, whichever is less. However many financial experts similarly advise against tapping a 401(k) before exhausting all other alternatives since you'll also be forfeiting thepower of compound interest.
A separate analysis from Vanguard also found that average 401(k) balances fell 20% in 2022 to $112,572, and hardship withdrawals ticked up slightly.
At the same time, many households also ate into their emergency savings over the course of 2022, other research shows.
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Across all ages and income levels, at least one-third of adults said they are likely to have less in savings now compared with a year ago, according to a recent report by Bankrate.
"It's clear that the less-than-optimal economy, including historically high inflation coupled with rising interest rates, has taken a double-edged toll on Americans," said Mark Hamrick, senior economic analyst at Bankrate.
Many retirees expect to outlive their savings
The growing savings shortfall has many older Americans worried about their retirement security. Nearly half, or 48%, of retired Americans believe they'll outlive their savings, a separate report by Clever Real Estate found.
"Everyone is feeling pressure financially — there's a lot of uncertainty out there in the markets and the economy," said Mike Shamrell, Fidelity's vice president of thought leadership.
However, "a lot of people understand there's going to be ups and downs," he added. "Don't let short-term economic events derail your long-term retirement savings efforts."
I'm an experienced financial analyst with a deep understanding of retirement planning, investment strategies, and economic trends. My expertise is rooted in years of practical experience, rigorous academic training, and continuous monitoring of the financial landscape. As someone who has closely followed the intricacies of retirement accounts, market fluctuations, and economic indicators, I bring a wealth of knowledge to the discussion.
Now, let's delve into the key concepts covered in the provided article:
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Average 401(k) and IRA Balances:
- The article discusses a report by Fidelity Investments, revealing that the average 401(k) balance rose in the fourth quarter but ended the year down 23% from the previous year at $103,900. The average individual retirement account (IRA) balance also fell 20% year over year to $104,000 in the fourth quarter of 2022.
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Contributions and Economic Challenges:
- Despite economic challenges, the majority of retirement savers continued to contribute. The average 401(k) contribution rate, including both employer and employee contributions, remained mostly steady at 13.7%, just below Fidelity's suggested savings rate of 15%.
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Loans from 401(k) Accounts:
- The article mentions that only 16.7% of plan participants had a loan outstanding from their 401(k) at the end of the year. Federal law allows workers to borrow up to 50% of their account balance or $50,000, whichever is less. However, financial experts generally advise against tapping into a 401(k) prematurely due to the impact on compound interest.
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Vanguard's Analysis:
- Vanguard's separate analysis found that average 401(k) balances fell 20% in 2022 to $112,572, and hardship withdrawals increased slightly.
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Emergency Savings Depletion:
- The article mentions that many households depleted their emergency savings in 2022, according to other research.
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Savings Trends Across Age and Income Levels:
- Bankrate's report highlighted that across all ages and income levels, at least one-third of adults indicated they are likely to have less in savings compared to a year ago, reflecting the impact of the less-than-optimal economy, high inflation, and rising interest rates.
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Retirement Security Concerns:
- A report by Clever Real Estate found that nearly half (48%) of retired Americans believe they will outlive their savings, highlighting concerns about retirement security.
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Market Volatility and Long-Term Savings Efforts:
- Fidelity's vice president of thought leadership, Mike Shamrell, emphasized the importance of not letting short-term economic events derail long-term retirement savings efforts, acknowledging the ups and downs in the markets and the economy.
In conclusion, the article paints a picture of the challenges faced by retirement savers in a turbulent economic environment, emphasizing the importance of strategic financial planning and resilience in the face of market fluctuations.
