Saving for retirement is important, now more than ever, as Social Security continues to dry out and people live longer lives. However, its somewhat difficult to truly gauge how much you need to be currently saving to hit your target. Some people choose an arbitrary number, say 10 or 20 percent of their gross income, whereas others may contribute up to the employer match. The better question to ask yourself is to figure how what type of lifestyle you want to be living in retirement, when will retirement be, and where will you retire. Those questions will factor in differently when considering your savings rate and method.
According to Vanguard, the average 401(k) savings rate was 6.8% of gross income in 2017, with the average balance being around $103,866. However, it is important to note that the amount that people are able to save significantly increase as they grow older.
See the chart below to see whether or not you’re ahead of the curve for your age group:
Under age 25
Average 401(k) account balance: $4,773
Average 401(k) savings rate: 4.8 percent
Age 25 to 34
Average 401(k) account balance: $24,728
Average 401(k) savings rate: 5.9 percent
Age 35 to 44
Average 401(k) account balance: $68,935
Average 401(k) savings rate: 6.3 percent
Age 45 to 54
Average 401(k) account balance: $129,051
Average 401(k) savings rate: 7 percent
Age 55 to 64
Average 401(k) account balance: $190,505
Average 401(k) savings rate: 8.3 percent
Age 65 plus
Average 401(k) account balance: $209,984
Average 401(k) savings rate: 9 percent
Source: Vanguard 401(k) data, 2017.
While retirement account balances certainly rise the longer you stay in the workforce, there are other strategies you can implement to help achieve a higher savings and better results:
1. Avoid Job Hopping
Unless the new job is providing a large pay raise and/or promotion, studies show how staying at your company may yield positive results for your retirement portfolio. Vanguard reports that employees who stay with the same employer for 10 years or more had an average balance of $188,744. Also, if the employer has matching contributions and profit sharing that vests with a certain period of service, this can also impact the balance that the employee will retain once they decide to move jobs. It's important to note than when you are moving to a new job, you can always roll over your old plan to an IRA, or create a self directed IRA to control your investments. Further, you may be eligible to move your old 401K balances to your new employer’s 401K program to keep the accumulation going.
2. Make use of tax-advantaged retirement accounts
As mentioned in previous posts, the key in achieving any success is consistency. By using a tax-advantaged account, you are avoiding or deferring the number one destroyer of wealth, which is taxes. By letting the portfolio compound and grow tax-deferred or tax-free (Roth 401K/Roth IRA), your savings will have a significant leg up on its non tax-advantaged competitor. In order to facilitate consistent saving, enroll in your 401K as soon as you join the company and also setup your IRA/Roth IRA for automatic contributions. While you are able to contribute a lump sum (up to $5,500 as of 2018) for your IRA, by consistently saving across a period of time, you will be able to avoid large market fluctuation losses through dollar cost averages.
3. Lower your fees
When investing in your employer’s 401K program or investing through an IRA brokerage, its important to be mindful of the fees which is another destroyer of wealth. According to USA today, approximately 95% of 401K plans have admin fees that cover such things as record keeping, legal fees, customer service, and transaction coordination. Furthermore, these fees are charged by the funds you invest with you 401K and is listed as “expense ratios”. Expense ratios basically represent a cost based on a percentage of assets. For example, if a million dollar S&P 500 fund has a 1% expense ratio, that means $10,000 of the fund goes to pay for expenses each year. My company uses Vanguard for our 401K plan. Vanguard is known for their low expense ratios which are driven by the fact that the Company’s shareholders are also the investors. This means that they are incentivized to keep costs low and provide maximum value to it’’s investors. However, this can vary from brokerage to brokerage. Especially when the funds are public companies with revenue targets, and need to satisfy the needs of it’s private investors, they may consider increasing fees to keep up with increasing costs and the need to generate a profit. In summary, be sure to review your 401K funds and choose funds that make sense for you (risk/reward) but also review the expense ratio to ensure you are not being gouged in fees.
4. Investing is a long-term play
The market has been going up and down in 2018, and it's understandable that investors are feeling uneasy, and want to move towards more cash in their portfolio. While this strategy may make sense if you are at or nearing retirement and want to reduce your portfolio risk, it's never easy to time the market. If you are a relatively young investor with decades left until retirement, you do not want market fluctuations to determine your investment decisions, which may lead you to sell low and buy again high. The average investor has limited knowledge and understanding of the macro economic factors and cycles that influence market changes. The best strategy one could implement is to “ride the wave” and continue to contribute to your account over a long period of time.
Take the advice of wise investor Warren Buffet, “Nobody buys a farm based on whether they think it’s going to rain next year,” he said on CNBC’s “Squawk Box. ” “They buy it because they think it’s a good investment over 10 or 20 years.” Simply put, Buffet decides a business is worth investing in because it will last, not because it’s doing well right now. He purchased See’s Candies with longtime business partner Charlie Munger in 1972 and spent more than $1 billion on Coca-Cola stock in 1988 — both of which turned out to be good bets and both of which he still owns today. “Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value,” Buffet wrote in his 1996 letter to shareholders. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.