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Fidelity® Reports Second Quarter 401(k) Analysis; Reveals How Saving Just One Percent More Now in 401(k), IRA Can Boost Retirement IncomeBOSTON – Fidelity Investments® today released its quarterly analysis of its 401(k) accounts— the largest in the industry2 — along with an illustration of how saving just a little more each month now could have an impact on retirement income, especially for workers in their 20’s.
At the end of the second quarter, the average 401(k) balance remained relatively steady over the previous quarter3, ending at $80,600, and up nearly 11 percent from $72,800 during the second quarter 2012. For employees who were continuously employed and in a 401(k) plan for the last 10 years, the average balance rose to $211,800, up nearly 19 percent from a year ago4. Additionally, for the past four years, more employees increased their 401(k) deferral rate than decreased it.
“While it’s a good sign that some workers are increasing their savings for retirement, many younger workers – especially Millennials5– aren’t saving at the recommended 10 to 15 percent of their income6,” said James MacDonald, president, Workplace Investing, Fidelity Investments. “It is critical young workers realize that even the smallest increase to their monthly savings today or just 1 percent – whether in a 401(k) or an IRA – could have a meaningful impact on their retirement paycheck down the road.”
Saving One Percent More a Month Now Could Boost Monthly Income in Retirement
To illustrate the impact of increasing 401(k) savings by just 1 percent monthly, Fidelity prepared two hypothetical scenarios of what the added savings could potentially translate into in retirement income for individuals that begin saving at ages 25 and 35 until the retirement age of 677. The scenarios demonstrate the potential positive, long-term impact a 1 percent monthly increase in saving today could have on a person’s potential monthly retirement paycheck. The impact is greatest for younger individuals with the longest savings time horizon.
The table below shows rates of return for two different hypothetical 401(k) participants. For each individual, it illustrates both the current “cost” and the impact a sustained 1 percent savings increase could have on their retirement paychecks using two different investment return rates – 5.5 and 7.0 percent nominal returns. The “costs” of $33 and $50 at ages 25 and 35 respectively are assumed to grow along with the individual’s salary at 1.5 percent per year until their retirement age of 67.
Hypothetical impact of 1% increase in savings now on estimated monthly retirement income
Click here for a visual infographic about the 1 percent increase.
Consistently Saving Extra $50 a Month in an IRA also Helps Build Better Outcomes
Saving in an Individual Retirement Account (IRA) is another great way to build savings for income in retirement. As a guideline, a 25-year-old who saves a consistent $50 more each month in an IRA until age 67 could receive an estimated $390 in additional pre-tax monthly retirement income. But waiting until age 35 reduces that additional monthly income in nearly half, illustrating the benefit of starting as early as possible.
The table below shows the potential impact $50 per month could have on both the 25 and 35-year-olds using two different investment return rates8– 5.5 and 7.0 percent nominal.
Hypothetical impact of $50 increase in savings on estimated monthly retirement income
Online Tools Help Investors Estimate Retirement Income
For more detailed estimates, Fidelity offers engaging online guidance tools, such as Retirement Quick Check (RQC) and Income Simulator on Fidelity.com and NetBenefits®, Fidelity’s workplace participant portal.
RQC uses an investor’s current income, expenses and assets, to estimate how much monthly income may be needed in retirement. It then shows the progress made with his or her current savings strategy and suggests steps to consider to best reach the goal. Income Simulator, launched earlier this year, is a tool available to workplace savers that automatically incorporates the user’s employer-sponsored retirement account plus offers them the option to add additional income sources, such as IRAs, Social Security, previous employer pensions and spousal savings. Its comprehensive modeling engine enables users to simulate different contribution levels, asset allocation and adjustments to anticipated retirement age to create a more detailed estimate. Fidelity recommends that investors review their portfolios at least once each year.
Guidance and Education Key Drivers for Improved Outcomes
In addition to Income Simulator and RQC, Fidelity offers comprehensive financial education to investors no matter how they work with our firm, at their workplace or on their own. Guidance is provided online, such as with our tools, over the phone, and in-person at our more than 180 investor centers nationwide.
Plan for Life, the company’s workplace guidance experience, offers education on topics such as investment diversification, age-based asset allocation, how to weather volatile markets, when to utilize catch-up contributions, and information on Roth options. Workplace guidance is offered online, by dedicated telephone representatives, and via in-person workshops including those focused specifically on the investment needs of women and pre-retirees.
In addition, Fidelity offers several educational resources at its online IRA Center where information on the benefits and different types of IRAs exists. The Fidelity Viewpoints Special Report: Retirement Roadmap provides a full selection of articles discussing timely issues pertaining to retirement.
About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.3 trillion, including managed assets of $1.8 trillion, as of July 31, 2013. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.
1 All data as of June 30, 2013 unless otherwise noted and is based on more than 20,700 corporate defined contribution plans, including advisor-sold, and 12.4 million participants.