Savings

The 401(k) savings rate just hit an all-time high

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Despite the stock market’s choppy performance so far in 2022, retirement savers remain surprisingly resilient and are keeping a record percentage of their wages.

The savings rate for 401(k) account holders hit a new high of 14% in the first quarter of 2022, according to a new report of Fidelity Investments. The 401(k) savings rate is the percentage of a person’s salary that is contributed to a 401(k), including employer and employee contributions.

While experts generally recommend a savings rate of 15% for individuals, the financial services company stressed the importance of achieving an all-time high rate of 14% in a volatile market. During the same period last year, the savings rate was 13.5%. Ten years ago, the rate was 12.2%.

“During times of economic uncertainty, it’s important that retirement savers stay focused on their long-term savings goals and don’t instinctively react to short-term market events,” said Kevin Barry, President of Fidelity, workplace investment, in a press release. statement.

Retirement account balances, however, have been hit hard lately, with the S&P 500 falling 20% ​​from its January peak. In the first three months of 2022, the average 401(k) balance fell 7% from the prior quarter, from $130,700 to $121,700. That’s down 2% from a year ago, according to Fidelity.

So far, retirement savers are taking the right approach.

“Encouragingly, Fidelity’s analysis revealed that the majority of retirement savers continue to exhibit positive savings behavior, which will help them stay on track to reach their goals,” Barry added. .

Namely, contribution amounts have not only remained stable, but have increased, and the vast majority of people with 401(k)s have not wasted their allocations in the face of a bear market. Fidelity data shows less than 6% changed their 401(k) allocations in the first quarter. And of those who did, 82% made just one change.

During the last bear market of 2020, Morningstar analyzed the behavior of more than 600,000 retirement savers. The firm found that those who continued to contribute and refrained from making major changes to their investment plans were able to hold up in the market.

“Assuming you’re in a risk-appropriate and well-diversified portfolio, the best approach is probably to hang in there.” wrote David Blanchett, former head of retirement research at Morningstar.

Much of the good news in the Fidelity report may be due to the prevalence of programs that automatically enroll workers and increase their dues. Fidelity reports that 90% of people who are automatically enrolled in their employer’s 401(k) end up staying enrolled. Similarly, 68% of premium increases in the first quarter were attributable to automatic increase programs.

As markets continue to decline and retirement account balances shrink, it can be difficult for retirement savers to stick to long-term savings goals, but it can have significant payoffs.

People who continuously contributed to their 401(k) saw their account balance increase by 124% over a five-year period; 350% increase over 10 years; and 644% over 15 years. In other words, those who saved continuously for 15 years had an average account balance of $64,900 in 2007. According to Fidelity, it’s now over $480,000.

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