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The Best Place to Save for Retirement

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In saving for retirement, it pays to make use of all the resources at your disposal. Rather than simply relying on 401(k) plans from your employer, adding your own personal IRA to your investing arsenal can make a monumental difference in how much money you end up with at the end of your career. Now, an analysis from Fidelity quantifies just how big that difference can be.

Getting the big picture
Every year, both Fidelity and Vanguard go through their customer lists to provide summary information on how well their respective clients are doing at saving in their 401(k) plan accounts. With millions of employees covered by 401(k) plans that Vanguard or Fidelity administer, the surveys provide a vast cross-section of the American population.

But 401(k) balances only provide part of the picture. With lifelong employment at a single business largely having become a thing of the past, most workers won't accumulate savings in a single 401(k) throughout their careers. Moreover, when workers switch jobs, they often choose to roll over old 401(k) plans not to their new employers but rather to separate IRAs. As a result, leaving out IRAs can lead to some highly questionable conclusions about the state of retirement readiness among U.S. workers.

Putting the puzzle together
To consider both pieces of workers' retirement savings at the same time, Fidelity's study looked at nearly 1 million of its customers that have both 401(k) plan accounts and IRAs with the financial company. By doing so, Fidelity captured more of how its customers save for retirement and measured its relative success in serving customers in both segments of its retirement business.

The results were far more encouraging than past studies that focused solely on 401(k) balances. Earlier, Fidelity's 401(k) survey had painted a dreary picture of the state of retirement savings, finding that the average workplace retirement plan balance was just $77,300. That low figure called into question whether participants would ever be able to retire on what they had managed to save.

But when you add in IRAs and 401(k) balances, the combined average rose to $225,600. For those within 10 years of retirement, the figures were even more promising, with averages between $325,000 and $360,000. Although the survey results aren't directly comparable, the clear implication is that for many savers, IRAs represent a much larger proportion of retirement savings than 401(k) plans.

Moreover, total contribution rates to IRAs and 401(k)s are also more encouraging when seen in combination rather than isolated to 401(k) contributions. Even savers in their 20s contributed an average of more than $6,000 to their retirement accounts, while those in their 40s and above were well over the $10,000 annual mark.

Why do IRAs beat 401(k)s?
Although 401(k) plans have contribution limits that are more than triple what IRAs allow you to set aside each year, the main advantages that IRAs have are more transparent and often lower fees, along with greater flexibility in choosing investments. With 401(k)s, workers are stuck with the investment options that their employers pick for them. By contrast, IRAs allow you to open an account with nearly any financial institution and invest in a much wider range of assets, going beyond mutual funds to give you access to individual stocks, bonds, ETFs, bank accounts, and many other investments.

Fidelity itself provides a good look at the advantages of IRAs over 401(k)s. Many employers who keep their 401(k) plans at Fidelity predominantly use mutual funds, and within Fidelity's FundsNetwork, you'll find many funds that charge relatively high annual expenses. By contrast, those of Fidelity's IRA customers who choose the company's brokerage option get free access to 30 popular iShares ETFs at no commission. On the stock side, for instance, iShares DJ EPAC Select Dividend (NYSEMKT: IDV  ) and iShares DJ Select Dividend (NYSEMKT: DVY  ) give investors dividend income from foreign and domestic stocks, respectively. At the same time, with iShares Barclays TIPS (NYSEMKT: TIP  ) and iShares Core Total US Bond (NYSEMKT: AGG  ) , Fidelity allows IRA investors to balance their stock exposure with bond investments that provide portfolio diversification.

A brighter picture
Of course, even this Fidelity study can't capture what retirement investors have with other financial companies. But even just taking this subset of customers shows not only that millions of Americans are concerned about their retirement but also that they're taking real action to address those concerns.

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  • Report this Comment On March 01, 2013, at 5:45 PM, boydlemon wrote:

    This is all good advice. Obviously, financial planning is key to a fulfilling retirement. But I want to call to the attention of baby boomers and anyone planning retirement or recently retired that emotional planning is important too. Going from a full time job to no job may seem ideal, but it is an enormous and difficult adjustment. Too many retired people end up feeling useless, with no purpose. Many suffer from episodic depression as a result, making what could be the best time of their lives, the worst time. Prepare yourself by finding a passion to pursue during retirement.

    Boyd Lemon-Author of "Retirement: A Memoir and Guide" (December 1, 2012); Eat, Walk, Write: An American Senior’s Year of Adventure in Paris and Tuscany (2011); and 5 other books. Information, reviews and excerpts: http://www.BoydLemon-Writer.com.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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