People may have plenty of other goals that they are saving and investing for, but one of the biggest will always be retirement. If you want to enjoy your golden years in relative comfort, you're going to need a hefty nest egg. So, how are we doing, generally, on accruing that cash stash?
In the "What's Up, Bro?" segment of this Motley Fool Answers podcast, Robert Brokamp reviews the latest quarterly analysis on the subject from Fidelity, which, with more than 30 million IRAs, 401(k)s, and other retirement accounts in its care, has a fairly good handle on the wide view. Overall, the data is upbeat, but there's one area in particular where far too many of us are making a less-than-ideal choice.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 21, 2019.
Alison Southwick: So, Bro, what's up?
Robert Brokamp: Retirement accounts are up.
Southwick: Yay! That's really good news!
Brokamp: That's what's up. It is good news! And we know this because Fidelity has released recently its quarterly analysis of the more than 30 million IRAs, 401(k)s, and other retirement accounts that investors have with Fidelity. So it's a pretty good survey of what people have and how they're doing.
And this latest report is particularly interesting because not only do they provide the most recent numbers as of the end of the first quarter of this year -- so March of this year -- but they provided the numbers from March from 10 years ago, which was right when the stock market bottomed after the Great Recession. We've talked before about how well the stock market has done since then, but this report gives us an idea of how much retirement savers are doing [compared to] then.
So, let's dig into six questions about the average retirement saver that this report answers.
No. 1. How big is it? And, of course, I'm talking about 401(k) account balances reaching $103,700, an all-time high. It's up 8% since the end of 2018, so that first quarter, and to be honest, I was a little surprised at that. I thought it would be more, because in the first quarter of this year the S&P 500 was up almost 14% plus people are putting more money into their accounts. I think the bottom line, is, of course, that not everyone is invested completely in the stock market, which is a topic we'll hit on a little later.
How does that $103,700 compare to a decade ago? $46,000 was how much the average person had in their 401(k), so it's more than doubled. Again, that's good, but you might have expected more given how well the stock market has done. But 401(k)s are tricky, because these averages could include everyone who's been there for 30 years and someone who's only been there for six months, so they very helpfully broke out the numbers of account balances based on what generation you're a part of as well as numbers for someone who's actually been participating in the same account for a decade. If you look at someone who's been participating in the same account for a decade, the average balance is $297,000 vs. just $52,000 a decade ago. So it's up 466%.
Southwick: Not too shabby!
Brokamp: Very good! Very impressive! And just in case you're curious, the average balance for someone who's been investing for 10 years: millennials, $129,000; GenX, $268,000; boomers, $357,000. This is good news, especially when you hear stats about the average amount that someone has, especially if they're at the age where they're about to retire. For those who are participating in a 401(k) and have been saving they're doing pretty well. That's how much people have saved if they're actually saving.
No. 2. What percentage of employees are actually participating in a 401(k)? The answer to this really depends on whether or not the 401(k) automatically enrolls people or not. If the plan automatically enrolls you -- once you join the company you're put in the 401(k) -- 88% of employees participate. If they don't, 52%. Big difference! Clearly, people need a nudge to sign up for the 401(k), and we hear about the retirement crisis and how people haven't saved enough. Obviously one answer is just to make sure everyone gets put into the 401(k). Once you're in there, only 9% of people then change their mind and say they don't want to be in there. Once you're put in the 401(k), the vast majority of people stay in it.
Southwick: But we're only talking about a slice of people in this country who actually have access to a 401(k). Think of all the people who don't even have access to a 401(k). Who have to go through so many more hoops to save money for retirement. It's a huge barrier to entry.
Brokamp: It really is. A little bit more than half of employees are covered by a work plan...
Southwick: Whether it's a pension...
Brokamp: A 401(k), a 403(b), or something like that, which means almost half don't. Now you can still choose an IRA, but IRAs have lower contribution limits. Also, you can set up a solo 401(k) if you're self-employed, but that's kind of a hassle. So having a job with a work plan is a huge benefit.
One thing also that is higher is the amount you're automatically enrolled in. So a little less than half are automatically enrolling people at 4% or higher, which means that more than half of the employers are automatically enrolling people at less than 4%, which in my opinion is too low. I think you can get away with automatically enrolling people and having them contribute more than that. If they don't like it, they can always change it, but I think that's also another way to be helpful.
No. 3. How much are people saving? The average employee is deferring 8.8% to their 401(k). Employers are putting another average 4.7% for a total of 13.5%, another all-time high, which is pretty good. We've talked, before, about how I think people should be shooting for 15%. That's if you're starting in your 20s or maybe even your 30s.
Southwick: Before the match.
Brokamp: No, the match included.
Southwick: Oh, including the match!
Brokamp: Match included. And that's part of what we've done, here, at The Fool. If you contribute 9%, you get 6% for that 15%. So people probably should be saving a little bit more, but still this is pretty good news.
Southwick: Yeah. Now I need to hop into Namely and double-check how much I'm contributing to the platform.
Brokamp: So question No. 4. How are they investing? This gets back to that question of asset allocation and things like that. The report really celebrated the fact that people are more diversified. For example, they had this stat saying that only 10% of the people are either 100% in stocks or 0% in stocks. All-in or all-out. Compared to 2009, it was 25% of people who were all-in or all-out.
Personally, as a relatively aggressive investor and a typical Motley Fool, I'm actually fine being all stock, so I'm not sure this is a great thing necessarily to celebrate, especially since stocks have done so well over the last decade, but, I do think generally diversification is important.
And the reason people are becoming more diversified is the use of target date funds. A target date fund is just a single mutual fund that owns other mutual funds -- a mix of stocks, bonds, cash, international stocks, U.S. stocks. Currently, 52% of people with a 401(k) at Fidelity are exclusively invested in a target date fund compared to just 16% in 2009. And this also goes back to the automatic enrollment, because for planned, automatically enrolled employees 90% of those people are being enrolled in a target date fund. I think it's a great solution, especially for the hands-off investor; but, even the most aggressive allocations do have some cash and bonds, so if you are a more aggressive investor, you might want to fiddle with that a little bit.
Southwick: Yes, I'm in a target date fund and I was thinking I need to maybe start contributing to a farther-out target date, just to maybe get a little bit more aggressive.
Brokamp: It is interesting, because we just recently, on the 401(k) committee here at The Fool, evaluated our target date funds, and we felt that the ones that we had were too conservative, generally, and we've replaced them with another set that are more aggressive; but they get really conservative right before retirement, which some people think is good. But it's a debate about what they call the "glide path" should be. It is pretty complicated. Again, target date funds, I think, are generally good, but you do want to make sure you have the right ones.
Two more things from the report. No. 5, are retirees choosing the Roth or the traditional? And the answer for 401(k)s is overwhelmingly the traditional. Almost 90% of people are going with the traditional. Only 11% are going with the Roth. But interestingly, when you look at IRAs, it's different. With the IRAs, 52% are Roth. So what people are doing is they're using the traditional for the 401(k), but then opening a Roth IRA which I think makes a ton of sense.
I did this for many years. You get the tax diversification of having a little bit of both. Also, generally speaking, people are more aggressive in their IRAs, because they can buy individual stocks. And if you want one account to grow the most, it's the Roth IRA because the distributions are tax-free and you want your tax-free account to grow the most. I thought that was pretty interesting.
They also had a stat in here where they said the average 401(k) account was $103,000. The average IRA was $107,000. But when you look at the average total of people with both 401(k)s and IRAs with Fidelity, the total is over $300,000. And I actually sent them a question. Why is it that the combined is so much higher than the separate? And they said the people with IRAs and 401(k)s are much more engaged and they save more. They also tend to be a little bit older. But I certainly think it makes a lot of sense that if you have the money, to invest in both.
And finally, No. 6. What made me cry the most? Well, they had a stat on what people do with their 401(k)s when they leave their job and we've talked about this before. 36% of the people cash out their 401(k). They don't roll it over to the next 401(k). They don't roll it over to an IRA. They take the money -- which means they're paying taxes, they pay penalties if they're not 59 and a half, and they miss out on all that future growth.
It also makes me sad because I know a lot of people are doing this for reasons they have no choice over. They might have medical bills, or something like that, and I certainly have sympathy for that, but please, if you're ever thinking of doing this and you don't need the money, roll it over to an IRA. You're going to save yourself a lot of current bills -- in terms of taxes and penalties -- but you're going to be very grateful you kept that money invested when you retire. And that, Alison, is what's up.