Source: Flickr.com; 401(k) 2012
According to a 2015 survey, 24% of Americans are not at all confident that they will have enough money for a comfortable retirement -- and they may be right to worry. As markets and financial products continued to evolve this past year, there are more considerations than ever for workers to be aware of. Here are five of the biggest 401(k) headlines in 2015.
1. Another $500 For 401(k) Contributions? Yes, Please!
The biggest 401(k) headline for 2015 actually came in October 2014, when the IRS announced a $500 increase in individual 401(k) contribution limits to $18,000 for 2015. From time to time, the IRS will bump up contribution limits to accommodate cost-of-living adjustments. The increase for 2015 was the first since 2013, when it was also raised $500 to $17,500. However, unlike 2013's boost, this year's also included a $500 increase in the ceiling for catch-up plans, allowing folks ages 50 and over to top up their 401(k) accounts with a total of $6,000 extra a year. For those who are maxing out their contributions (and for those who should be), this represents a sizable 2.9% limit increase, and 4.3% for those 50 and over.
2. Retirement Records
In the first quarter of 2015, Fidelity Investments (the nation's largest retirement services company) announced another milestone in market recoveries: The average American's 401(k) balance hit a record high of $91,800. Additionally, over the year prior, a record 23% employees tracked by Fidelity Investments increased their contribution rates. Including both employee and employer contributions, the average savings rate was 12.5%. Rates that high symbolize smart strategic thinking by individual savers, and also suggest an economy in which workers have more funds to set aside and more confidence about the long-term future of their investments.
3. 401(k) Loans Get Larger
While employees are contributing more to their 401(k)s, they're also making more use of 401(k) loans than ever before. 401(k) loans allow workers to borrow up to $50,000 against the value of their 401(k) accounts. In the first quarter of 2015, the average loan size clocked in at $9,720. That was a sizable increase from the average loan amount of $8,620 in 2010.
As fellow Fool Dan Caplinger explains, 401(k) loans are attractive due to their easy access, and because the interest borrowers pay ends up back in their own accounts. But money pulled out of your 401(k) account for a loan is money that's not generating tax-deferred investment returns. So unless your loan can earn you more money than a steady retirement savings account (hint: it might not), taking out a 401(k) loan is not necessarily a wise retirement move.
4. The Rocky Retirement Road
Source: Flickr.com; 401(k) 2012
Fast-forward two 2015 quarters and retirement records turned into roadblocks. After a rollercoaster stock market took accounts for a ride, the average Fidelity Investments 401(k) balance declined to $84,400 for the third quarter. Savings rates clocked in at 8.2%, just above 2014's third quarter, but well below the rates at the start of 2015.
These sorts of quarterly shifts don't bode well for long-term savers. Cutting contributions when markets turn rocky and expanding them during smooth times is equivalent to "buying high and selling low," a poor strategy that chips away at earnings over time.
5. Steady as She Goes
Despite 2015's new twists and turns, there's one piece of long-standing 401(k) logic that will never change: Save early and save often. If you start investing $5,000 a year at age 25, continue for 10 years, and then stop and leave the account untouched until you're 65, you will ultimately retire with a nest egg more than twice as large as to someone who did the same thing starting at age 35.
2015 might've been an up year for markets and savings, or it might've been a downer. But individual years' results don't matter much for long-term investors and smart savers, and the biggest 401(k) headlines of 2015 will seem like soft whispers in another few years.
