Retirement saving has always been an important part of ensuring long-term financial security. Yet with the ups and downs in the economy over the past decade, many Americans have found themselves getting derailed from their plans to save ambitiously for retirement. Fortunately, as economic conditions have improved in recent years, more American workers have been able to put more of their money toward long-term financial goals, and one group in particular has done a particularly good job of staying on course. Below, we'll take a look at the people who are doing the best at seeing their retirement savings grow and show you how you can join them.
The state of the IRA
Earlier this year, the Employee Benefit Research Institute did a comprehensive examination of account balances in Individual Retirement Accounts over the past several years. Collecting data on nearly 26 million accounts owned by more than 20 million individuals, the EBRI looked at the progress that retirement savers made between 2010 and 2013, collecting information on account balances, participation rates, contribution amounts, and other key factors affecting retirement saving.
Overall, as you'd expect, IRAs fared quite well during the three-year period, following the strong performance in the U.S. stock market. The EBRI found that average account balances rose from about $92,000 in 2010 to nearly $120,000 in 2013, a gain of more than 30%. The study also looked at median balances, recognizing the fact that accounts that wealthier individuals own have a disproportionate impact on average figures. Median numbers were lower but reflected similar gains of about 27% between 2010 and 2013.
Yet one of the more surprising results from the study came from looking at who did the best job at making contributions to retirement accounts. Even though you'd think that older workers would be more honed in on making sure that their retirement planning is in order, the findings showed that, at least in some key areas, younger Americans are doing a great job in planning for their future.
Young workers are using their Roth IRA opportunity
In particular, the EBRI found that Roth IRA owners between 25 and 29 years old were the most likely to contribute to their retirement accounts, with almost half making contributions to their Roth accounts during 2013. Participation over longer periods of time was even more encouraging, as nearly 60% made a Roth IRA contribution in at least one year between 2010 and 2013, and more than one in five contributed to their Roth IRAs in all four of those years. By contrast, those participation rates dropped as ages increased, and the corresponding figures for traditional IRAs failed to reflect a major uptick that would have indicated a shift away from Roths toward tax-deductible traditional IRA contributions.
In addition, Roth IRA savers aren't letting any concerns about saving enough for retirement stop them from making contributions. Among those who contributed regularly to an IRA in all four years from 2010 to 2013, about one in three traditional IRA owners maxed out their IRA contributions, compared to just one in four Roth IRA owners. Still, younger workers did a good job of putting money toward their retirement, with average contributions for those in their 20s generally falling in a range between $3,000 and $3,500.
Clearly, younger workers have a long way to go before they can declare eventual victory in their retirement savings efforts. As you'd expect, average account balances were much lower for those in their 20s, as they'd had a relatively short period of time in which to save money for retirement. Nevertheless, the fact that they've gotten an early start in moving forward with their retirement savings strategy bodes well for their eventual success, especially if they get positive motivation from their early experiences and continue to see the benefits of setting money aside on a regular basis.
Finally, it's encouraging to see more young workers take advantage of Roth IRAs. It's tempting to grab any chance at tax savings right now, and using a Roth requires the foresight to give up that immediate gratification in exchange for what in the long run can be a much larger tax-saving opportunity. By recognizing that they're in a particularly good position to benefit from the tax-free nature of the Roth IRA, those in their 20s are generally making smart moves by emphasizing the Roth IRA in their retirement planning.
Saving for retirement is important, and even if you aren't rich enough to dedicate thousands of dollars toward your golden years every month, it's important to realize that every little bit adds up to a whole lot more over the long run. Using tools like Roth IRAs can dramatically improve your financial prospects for your retirement.