The secret is consistent saving. By starting your savings early and regularly adding to your investment, your results will be spectacular.
The Data Is In
Based on data from Fidelity Investment, the 547,000 401(k) account holders who maintained their 401(k) with the same employer since 2001 presently have an average account balance of just over $331,000, up from an average of $43,900 fifteen years ago.
Now, compare their success with the investment results of the entire group of Fidelity Investment’s 14.5 million 401(k) account holders whose average account is only $90,600. Clearly, this $240,400 difference makes the case for early and steady retirement investment.
“The lesson is to get in when you start your career and save over time,” says Jeanne Thompson, one of Fidelity Investment’s senior VPs who tracks 401(k) trends. “The market and your contributions together will drive the growth.”
Even More Data
The Investment Company Institute and the Employee Benefit Research Institute reported similar findings in their study, What Does Consistent Participation in 401(k) Plans Generate? (EBRI Issue Brief #426, September 2016.) Their results concluded that consistent contributions are the essential key to building a large 401(k). Their study researched 3.5 million 401(k) account holders who held 401(k) accounts for a seven-year period, from the end of 2007 through the end of 2014. The group that consistently contributed to their account achieved much higher results than the comparison group of 25 million 401(k) account holders.
At the end of the seven-year range, 26.9% of the consistent group had over $200,000 in their 401(k) compared with only 10.7% in the broader database. Similarly, 19.3% of the consistent group had between $100,000 and $200,000 in their 401(k) account compared with only 9.5% in the broader database. As well, the consistent group had an average account balance of $170,290… which was more than double the average account balance of $76,293 for the entire database of 401(k) account holders. Further emphasizing the point, consistent participants had a median account balance of $87,418 which was more than four times the $18,127 of the overall database. The message is clear: consistent savings and investment over a period of time results in a much larger account balance.
The ICI/EBRI study also determined there are three primary factors which affect account balances:
- Withdrawal and loan activity
- Investment return
To increase the possibility of your 401(k) account growing larger over time, consider the following suggestions:
- The start of a new calendar year is a great time to do a 401(k) check-up, a task you should do annually. Look at your Investment Policy Statement (IPS) to make sure your goals are still the same as when you first began your investments, and schedule a meeting with your company’s 401(k) advisor to review your holdings so you can make sure your investments are in the right proportions according to your plan.
- If your employer offers matching funds, save enough to at least acquire the full company match. If possible, try to increase the amount of contributions you make every year because these extra dollars could make a huge difference to your retirement lifestyle. Small changes made over time can add up to big benefits later.
- Taking loans and withdrawals from your 401(k) account may only hurt you in the long run. Do your best to avoid borrowing from your future. Time is your biggest ally right now; as you saw from the data, money can increase dramatically when left undisturbed.
- Exercise extra caution when making investment decisions and consult with an investment specialist. Your 401(k) is important to the health and wealth of your retirement years, so it deserves extra attention. You don’t have to become an expert, but you should educate yourself well enough to know why you are investing in the funds you’ve selected and how these choices work together to increase and preserve your wealth.
- If you change jobs and move to a new company, enroll in your company’s 401(k) plan as soon as possible so your tax-deferred savings are not interrupted. You should also discuss and consider the value of rolling over the 401(k) balance with your former employer into your new account so there’s less record-keeping, and so it’s easier to take disbursements when you’re 70½.
Contributions for 2017
For those employees who participate in a 401(k), the 2017 annual contribution limit is $18,000, the same as in 2016. There is also a catch-up contribution limit for those employees who are 50 or older, and the amount remains the same in 2017 at $6,000. If you are self-employed, the amount you can save in a solo 401(k) rose from $53,000 in 2016 to $54,000 in 2017. You may even be allowed to make after-tax contributions to your 401(k). Whichever choice is right for you, be sure to consult with your financial advisor to ensure you make the best decision for your unique circumstances.
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington 98104