Most everyone understands that if you start saving early, you can reasonably expect to have more retirement income accrued than if you wait.
In its most recent quarterly analysis of its 401(k) accounts, Fidelity Investments emphasized just how much a 1 percent per month increase in deferral can have on a worker’s monthly retirement income.
A 1 percent increase per month at age 25, for a person who makes $40,000 a year, would add up to about $330 per month of pre-tax retirement money at an assumed rate of return of 7 percent. At a 5.5 percent rate of return, the additional monthly income would be $200.
If that same employee didn’t start saving until age 35, but made $60,000 a year, they would only have $270 extra per month at a 7 percent rate of return. At a 5.5 percent rate of return, they would have about $180 per month.
The scenarios demonstrate the potential positive, long-term impact a 1 percent monthly increase in saving today could have on a person’s potential monthly retirement paycheck. The impact is greatest for younger individuals with the longest savings time horizon, according to Fidelity.
Workers can do the same for their individual retirement accounts. Using the same earnings and savings scenarios as for the 401(k) plans, Fidelity found that a person who saves 1 percent per month more at a 7 percent rate of return would have $390 extra in their monthly retirement check. At a 5.5 percent rate of return, they would have $230 per month. By waiting until age 35, this individual would receive about half the amount of money as their 25-year-old counterpart.
“While it’s a good sign that some workers are increasing their savings for retirement, many younger workers – especially Millennials – aren’t saving at the recommended 10 to 15 percent of their income,” said James MacDonald, president, Workplace Investing, Fidelity Investments. “It is critical young workers realize that even the smallest increase to their monthly savings today of just 1 percent – whether in a 401(k) or an IRA – could have a meaningful impact on their retirement paycheck down the road.”
Fidelity’s analysis also found that the average 401(k) balance remained steady over the previous quarter, ending at $80,600. More dramatically, that’s up nearly 11 percent from $72,800 in the second quarter of 2012. For employees who were continuously employed and in a 401(k) plan for the last 10 years, the average balance rose to $211,800, up nearly 19 percent from a year ago.
For the past four years, more employees increased their 401(k) deferral than decreased it.
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.3 trillion, including managed assets of $1.8 trillion, as of July 31.