The nation’s largest administrator of retirement accounts advises that younger workers who boost savings by just 1% can meaningfully impact their monthly paycheck at retirement.
Fidelity Investments added the financial planning advice to its latest quarterly analysis, released Tuesday, of asset levels and participant behavior among the firm's 12.4 million 401(k) plan participants.
The Boston-based investment manager, which administers the most retirement assets in both 401(k) plans and IRAs in the U.S., noted the average 401(k) balance rose nearly 11%, to $80,600, at the end of the second quarter from the previous year.
That balance was far higher — $211,800 (up nearly 19% from a year ago) on average — for continuously employed workers enrolled in a 401(k) plan for 10 years.
Another positive trend: For the past four years, workers have continued to increase their salary deferral rate.
But the asset management behemoth seized the occasion of its quarterly report as a teachable moment, warning that younger workers in particular are not saving at a recommended rate of 10% to 15% of income (including employer contributions).
“It is critical young workers realize that even the smallest increase to their monthly savings today [of] just 1% — whether in a 401(k) or an IRA — could have a meaningful impact on their retirement paycheck down the road,” said Fidelity’s James MacDonald, president of its Workplace Investing unit, in a news release.
To illustrate this impact, Fidelity says a 25-year-old worker earning $40,000 annually would need to put away just $33 a month.
After various assumptions embedded in a lengthy footnote — for example, an assumed 1.5% annual income growth spanning the worker’s career, retirement at age 67 and no hardship withdrawals — that worker could increase his monthly paycheck by $330 a month if he is fortunate enough to earn a 7% annual rate of return. At a 5.5% average annual return, the worker would still see a $200 monthly increase in his retirement paycheck.
If an older, 35-year-old worker earning a higher salary of $60,000 a year takes the initiative to stash that 1% of her income for retirement, her pretax monthly paycheck could rise by as much as $270 at a 7% rate of return, or by $180 at a 5.5% average return.
Fidelity also offered illustrations of young workers saving a higher, but flat (vs. percent of income) monthly amount ($50) in their IRA accounts.
The takeaway there was that, at least in the case of an assumed high rate of return of 7% annually, the young worker starting at the later age of 35 increased her retirement paycheck by little more than half ($220 per month) the amount attained by the worker who initiated that discipline at age 25 (realizing a $390 monthly paycheck increase).
For those who feel an income plan for their retirement is worth the investment of 30 minutes of their time, Fidelity offers an online retirement calculator allowing workers to chart their own income trajectory by noting assets, savings behavior, return assumptions and expected expenses.
Check out 401 (k)s More Confusing Than Health Insurance: Charles Schwab on ThinkAdvisor.