Saving

60% of Americans feel confident they'll be able to retire: Here's how much is in the average 401(k)

"It's important to balance current and future financial priorities."

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Though the Covid crisis has left millions of Americans cash-strapped and living paycheck to paycheck, the average individual retirement balance hit a new record in the last quarter of 2020.

Fidelity analyzed retirement savings trends across more than 30 million 401(k), IRA, and 403(b) accounts and found that the average 401(k) balance reached $121,500, up 8% from the year before. IRA balances and the typical 403(b) account balance also set new records. Some of that boost came from market performance, but it also helped that many workers maintained or even increased their contributions during the pandemic.

A separate survey from Coventry Direct points to more good news. Researchers, who polled more than 1,500 adults to gauge their saving habits and learn how they manage their money for the future, found that just 21% didn't think they would have enough money for retirement someday. Well over half, or 60%, felt confident about their chances, and the remaining 19% were undecided.

Meanwhile, 45% expected to be able to gradually increase their contributions and 46% anticipated that their income will grow over time. Both of those are factors that help improve retirement prospects. Almost two-thirds, 65%, said they would consider taking on a second job to save for retirement.

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Young people are "too often unprepared for retirement, and Covid's financial implications have only raised the stakes," says Dan Barcus, Coventry's senior vice president. "It's encouraging to see that the majority of people surveyed are saving for retirement, but there is still room for growth," he adds. "It's important to balance current and future financial priorities."

When asked about their savings priorities, Coventry's respondents pointed to retirement as their No. 1 choice. More than a third, 31%, selected it as their top goal. The second-most popular option was buying a home. Another 20% said they were prioritizing building an emergency fund.

How you save for retirement is key

The top vehicle Americans used to save for retirement was their 401(k), according to Coventry. More than a third of respondents, 35%, say they are using one. A quarter, 25%, were saving in a traditional or Roth IRA, and 13% said they were saving more for the future in both a 401(k) and an IRA.

To comfortably set yourself up for retirement, experts recommend investing about 15% of each paycheck toward retirement. That includes your own contributions, and in a workplace account, any your employer makes on your behalf.

How you save for retirement can be nearly as important as how much you save, says Daniel Burnside, a CFA and CFP who is also a clinical professor of finance at the University of Rochester.

"Funding a retirement properly can be expensive," he points out. Unlike saving for a specific purchase, like a car or house, Burnside adds, the "cost is much less certain. Absolutely max out the contributions in whatever tax-deferred retirement plan your employer provides. Don't pass it up. You don't know how long you will live, and it is difficult to forecast the amount of money you need."

If you can't max out the savings allowed in your plan, says Burnside, "whatever you do, make sure to defer enough to max out whatever matching contributions your employer provides."

By making regular contributions, you'll capitalize on compound interest to help your money grow. And because of the way interest accrues, it's helpful to start early: Someone saving $5,000 a year at age 25 will have twice as much money by age 65 as someone who waited until 35 to start.

None of us know what changes will be made decades from now to Social Security or retirement plans or the tax law, Burnside says, and no one knows for sure what health care or housing costs, or other major expenses, will look like. All these uncertainties make it smart to err on the side of caution and save a bit more rather than less. 

"What do you do when you have to drive to the airport and are unsure about the traffic? You leave earlier," Burnside says. "And when you don't know how much money you need 30, 40, 50 years from now, you save more. It's the same logic exactly."

When you don't know how much money you need 30, 40, 50 years from now, you save more.
Daniel Burnside
University of Rochester

There are challenges to saving for the future. Lost jobs and slashed wages continue to plague Americans. Plus, credit card debt, mortgage payments, and student loans get in the way of saving, according to the survey. Focus on the essentials first if you've lost income in the pandemic. Take care of housing costs, food, and any immediate expenses.

"Your savings and investment plan can't be based on everything going perfectly," says Burnside. "You have to plan for things going wrong. It's a cliche but it is true: Pay yourself first."

Nearly 80% of people in the Coventry survey said they follow a budget, which is a major step in managing money your money. It's still hard to pinpoint exactly how much you should earmark to retire. 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. If you're not sure what to put away, Grow's retirement savings calculator can help you get a sense of what your goal should be.

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