Everyone panicked a little during the financial crisis, but the 1.6% of pre-retirees who abandoned equities altogether lost out big.
Pre-retirees (age 55 or older) who dropped stocks from their 401(k) by the first quarter of 2009 and never rebalanced have seen their balances grow by only 25.9% through the first quarter of 2013, according to a new report from Fidelity. Their average balance rose during this period from $80,200 to $101,000.
Most people are doing much better.
The average pre-retiree 401(k) balance has nearly doubled since the depths of the downturn, rising from $130,700 to $255,000.
“There is a valuable lesson to be learned from the minority of pre-retirees who abandoned equities altogether and experienced significantly less progress,” said James M. MacDonald, president, Workplace Investing, Fidelity Investments. “It underscores the combined importance of a proper asset allocation and savings behaviour as they planned for retirement within all that life entails.”
Overall, the 401(k) picture is looking brighter. 401(k) balances are at their highest level since the market crash, Fidelity found, reaching $80,900 in the first quarter –– an 8.4% bump over the last year and 75% higher than at the market low in 2009. Two-thirds of that growth can be attributed to gains in the stock market. At the same time, workers have been upping their personal contributions, as well as employers.
Still, $225,000 isn’t exactly all that much to live on through your golden years. Retirees are expected to need as much as $220,000 saved up just for health care costs alone, according to another study by Fidelity earlier this month.
Mark Hebner, President of Index Fund Advisors, has long been a proponent of the Jack Bogle line of thinking –– that keeping your savings in a low-cost index fund that tracks the market, keeping your head down even through tough times, and rebalancing as you age is the safest and surest way to grow your wealth.
But even with a wealth of research to support the index funds approach, even he couldn’t convince all of his clients to stay the course after the crash.
“One client came to see me on the very bottom day, March 9, 2009,” Hebner told us. “I had talked her out of selling numerous times, but she told me, ‘I see nothing but darkness on the horizon and I don’t want to lose any more money.’
That’s a fear that sets in, especially if you’re a single widow in your late 60s and all you want do is stop the pain. You’re scared to death and you think your investment advisor just wants to make money off you or whatever or that I have a bias and therefore I’m talking her into doing what may be against her best interests.”
Fidelity is the nation’s largest administrator of 401(k) plans. It’s analysis is based on a survey of its accounts, including employees who have worked more than 10 years with their employer.