The Great Recession left millions of workers –– young and old –– way behind on their retirement savings goals, but half a decade later, things are finally starting to look up.
A new report by Fidelity Investments found that IRA balances are at a five-year high in the U.S., based on an data from more than 7 million retirement accounts.
Today, the average IRA balance is $81,100, a healthy 53% increase from their low-point in 2008. The 30-49 year old sect has made the greatest gains, which is excellent news for Generation X. They lost half of their wealth during the recession, and according to Fidelity, their IRAs have shown 105% growth over the last five years, while 40-49 year olds saw 90% growth.
Recovery has been unsurprisingly slowest for the 70+ crowd, who were likely had the unfortunate pleasure of retiring right in the thick of the economic downtown.
Age Range Average IRA Balance At
End of 2012 Tax Year Average IRA Balance At
End of 2008 Tax Year Percentage Increase 20-29 $9,300 $5,800 60 per cent 30-39 $20,700 $10,100 105 per cent 40-49 $42,500 $22,400 90 per cent 50-59 $75,700 $41,900 81 per cent 60-69 $127,800 $75,000 70 per cent 70+ $164,300 $110,500 49 per cent All Ages $81,100 $52,900 53 per cent
Another positive sign: Thanks to tax law changes in 2012, investors scrambled to take advantage of Roth IRA conversions, which were up 52% for the month of December 2012 alone. With a Roth, all contributions are taxed at today’s rate and given the chance to grow-tax free for retirement. Summer is a great time to review your 401(k) or IRA to be sure it’s working for you.
Here are some tips:
- Diversify. We know. This whole ‘diversify’ line is getting old. But it’s a crucial part of the game, and as you age, you’ll need to rejigger your investments to reflect your risk tolerance. With the recent stock market comeback, you may need to consider rebalancing to get back to your target allocations. If you’re unsure, seek advice from a fee-only financial advisor.
- Match, match, match. This is a no-brainer. Have an employer that matches your retirement contributions? Do whatever you can to contribute as much as they’re willing to match, or you can kiss that free money goodbye. Don’t even think about it. Automate your paycheck so that a portion goes immediately into your 401(k) and never touches your hands. Trust us –– it’s harder to miss something you never had.
- Don’t over-invest in your employer. The ideal allocation for company stock is between 10 and 20% (and that’s being generous). You don’t want to load up too heavily on employer stock options, no matter how well they’ve performed this year.
- Revisit your fees. New fee regulations on 401(k)s haven’t exactly made them all that much more transparent, but that doesn’t mean you can’t do your own digging to find out if you’re getting fleeced. You’ll have to dig into your plan documents online, or you can try giving your customer service centre a call. Look for a section titled “Expense Ratio.” High fees of actively-managed funds are why we are huge proponents of low-cost investment options like an index fund. They are super cheap and have proven time and again to beat the market –– and investment professionals themselves. Luckily, many employer-provided plans include index fund options.
- Don’t be tempted to dip in. It’s natural to be tempted by a big pot of cash, especially when that pot belongs to you and is so very accessible. Don’t do it. Please. Taking out a loan against your 401(k) is tantamount to hopping in a time machine, going into the future and robbing yourself when you’re old and grey. Unfortunately, summertime is a hot season for 401(k) loans, when pricey expenses like college tuition start rolling in and your tax refunds dry up. Not only will you pay fees as high as 10% for early withdrawals, but if you leave your job for any reason before you finish paying back your loan, you’ll have to pay in full as soon as 30 days after.
The bottom line: keep your eye on the prize. Your 401(k) is a slow cooker and your savings are that pot roast that will only get more tender and delicious (and rich) the longer you let it simmer. You’re kidding yourself if you think you can time the market or compete with the traders and fund managers who try and fail to do just that on a daily basis. The best game individual investors can play is a long one.
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