(MP) 401k contributions reached a record high last year, thanks to a soaring stock market we see even larger balances in 2015, says CNN Money. Last month, Fidelity Investments reported average balances in retirement savings accounts hit a record high last year. Fidelity then said the average account balance grew to more than $91,000.
Fidelity is one of the largest financial services and mutual fund management companies in the world, so we tend to listen when they speak. About 72,000 workers had amassed $1 million or more in their 401k retirement plans at the end of 2014, according to Fidelity. That’s nearly twice as many as in 2012 and almost five times as many as a decade ago. The increase was due largely to the stock market, which saw the S&P 500 climb by more than 10%– its third year of double-digit gains.
What’s the 401k lowdown?
Bigger worker contributions certainly played a significant role. On average, workers saved 8.1% of their salary, the highest savings rate recorded by Fidelity since 2011. Including an employer match, workers saved around 12% of their salary, which falls within the 10% to 15% recommended by financial planners. “Credit the increased savings rate to a growing number of employers who automatically enrolled workers into their 401(k) plans at a contribution rate of 5% or more,” says Jeanne Thompson, a vice president at Fidelity.
Retirement investments are doing especially well. People in their 401k plan for 10 years or more had an average balance of $248,000 — an increase of 11% from what similar investors had a year ago.
The good and bad news
The bad news is most people will need far more than 250K for a comfortable retirement. The common 4% rule for example, indicates that $250,000 would give only $10,000 a year in retirement income. Try living off that even with added Social Security benefits and you’ll soon join the ranks of the impoverished.
So, how will the new retirement investments changes affect workers in 2015? For one thing: Investors will also be eligible to contribute $18,000 more to a 401k this year. Is that enough? I think not. I suggest you follow what I recommend my millionaire clients:
1. Contribute at least 10 to 15 percent of your pay
Employees have ramped up their savings on average over the past few years, reaching a savings rate of 8 percent last year – the highest rate since 2011, according to Fidelity. The average 401(k) contribution was $9,670 with employee and employer contributions. Meanwhile, the savings rate for the average 401(k) millionaire was nearly 16 percent or $21,400 in 2014, not including the company’s matching contribution.
2. Meet your employers match
By taking advantage of a company’s matching contribution –the average contribution for a 401k millionaire rose to $35,700 last year. Today most employers match the money that you contribute in some how. Take advantage and don’t leave “free money” blowing in the wind. Contribute at least up to your company’s matching amount, Thompson advises. Then increase your contribution by one percent per year until you reach your 15 percent goal. That is your goal.
3. Take full advantage of “catch-up contributions
“It’s taken decades for many 401k millionaires to save that sum—meaning they’re almost 60 years old, on average. That makes them eligible to contribute even more money to their workplace retirement plan. The maximum contribution to a 401k in 2015 is $18,000; but if you’re 50 or older, you can contribute an extra $6,000.
Remember, I haven’t looked at your portfolio and can’t legally advise you. First, see your financial planner or investment manager to get a realistic approach needed in your situation.