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Americans boosted their retirement savings during Covid: Here’s how much money they put away

Many Americans were increasing their savings and “spending less on their lifestyle.”

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Americans didn't stop saving for their financial futures last year, even though the pandemic made it hard for many people just to make it to the next paycheck. Despite economic uncertainty, the average individual retirement balance hit a new record.

That's according to data from Fidelity, which analyzed retirement savings trends in the fourth quarter of 2020 across more than 30 million 401(k), IRA, and 403(b) accounts. The researchers studied account balances and contributions.

The trend highlights the unevenness of the economic recovery. "People fall into two camps," says Shaun Melby, a CFP and owner of Melby Wealth Management in Nashville, Tennessee. Some are struggling with a Covid-related job loss or other loss of income. Others have "been affected by the pandemic but their industry has been able to adjust and they're continuing forward relatively unscathed," he says.

In the second case, he says, people are "continuing to contribute to retirement funds, and in a few cases, increase their savings rates as they are spending less on their lifestyle."

How much money Americans saved for retirement

The average 401(k) balance reached $121,500 at the end of 2020, an 11% increase from the year before and up 8% from the previous quarter. IRA balances hit $128,100, an 11% spike from last year's $115,400 average and a 9% jump from the quarter before. The typical 403(b) account balance saw a record, too: It rose 10% from last quarter to $106,100 and hit six figures for the first time.

Balances benefited from the market's gains, but another reason balances were up is because employees saved more. Across Fidelity's 401(k) platform, one in three adults increased their contributions in 2020. The savings rate for 403(b)s and 401(k)s both hit new highs during the fourth quarter, with participants contributing an average 7% and 9% of their pay, respectively. Combined with employer contributions, the total savings rate for 401(k)s was 13% and 11% for 403(b)s.

How you save for retirement can be nearly as important as how much you save, Mike Webb, vice president of Cammack Retirement Group in New York, told Grow last month. "If your company's retirement plan matches employee contributions, saving at least the minimum amount to receive the maximum match in that plan will ensure that you don't leave any 'free money' on the table in your attempt to accumulate retirement wealth."

Overall, 35% of IRAs received a contribution last year, with an average contribution of 5%, according to the findings. As more of Generation Z enters the workforce, many are opening IRAs: The number of new accounts held by someone in that generation tripled in the fourth quarter. Gen Zers were born after 1996, according to Pew Research: The oldest members of that generation turned 23 last year.

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Compound interest makes saving worth it

Americans made the right move boosting their contributions, experts say. To comfortably retire, they recommend investing about 15% of your paycheck in a workplace retirement account or IRA. That total includes your own contributions, and any your employer makes on your behalf.

Pinpointing how much you should save for the future can be a challenge. Nearly 60% of Americans think $1 million is the amount they need to live out their golden years, but that number is different for everyone. Take a look at Grow's retirement savings calculator if you're not sure what to put away, and to get a sense of what your goal should be.

By making regular contributions over your career to accounts including 401(k)s, Roth IRAs, and traditional IRAs, you're harnessing the power of compound interest to help your money grow. Compounding means you earn a return not just on your money but also on the interest it has already accrued.

"Millionaires are made in their 20s and 30s, not their 50s and 60s," Fred Creutzer, president of Creutzer Financial Services told Grow. "If you wait until you're 50, you're never going to catch someone who started at a young age. When it comes to investing, the early bird gets the worm."

Save money early and be consistent

A significant number of Americans have struggled financially throughout the pandemic. Overall, three in 10 people said they've decreased how much they're setting aside for retirement or stopped saving altogether, according to an August FinanceBuzz survey. Another survey, from MagnifyMoney, found 30% of adults had pulled an average of $6,757 out of their retirement account because they lost a job or needed extra cash.

If you're making less now because of Covid, know that while saving for retirement is an important goal, you shouldn't neglect immediate expenses such as housing and food. Experts recommend focusing on essentials first, and balancing emergency fund savings with other financial goals.

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How much you're ultimately able to save for retirement will depend on your individual finances. Kevin Barry, the president of workplace investing at Fidelity, said in a statement that there's no secret to growing your wealth with compounding: The key is to start saving early and be as consistent as you can.

"Taking a long-term approach, which includes consistent savings efforts and asset allocation, can help investors weather the economy's ups and downs," he says. "Last year was challenging and we still may have rough patches ahead, so it's more important than ever to stay the course and keep focused on the key steps that will help investors reach their retirement goals."

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