Who says Americans have a hard time saving for the future? Fidelity has a new report out indicating that the balances in both 401(k) and IRA accounts that they oversee are at near-record highs.
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Fidelity numbers are good news for investors
The average account balance in Fidelity-administered 401(k)s during the second quarter of this year rose almost 2% to a high of $88,900. That’s just a smidge below the all-time high of $91,800, which dates back to the first quarter of 2015.
Meanwhile, on the IRA front, the average Fidelity balance is sitting at $89,694, which is a bit further off the mark vs. $96,306 during the same quarter last year.
Both numbers show great strides in progress during a year that’s been marked by both extreme ups and downs in the stock market.
Investing and saving for your future doesn’t have to be complicated. Here are a few strategies to set yourself up for success…
Set up automatic withdrawals
Putting your finances on autopilot is downright dangerous when it comes to paying a utility company, a health club, a mortgage lender, a cable provider, a cell provider or any other business. But it’s absolute genius when it comes to investing.
Automatic withdrawals are a great thing when you’re contributing money to a retirement, investment or savings accounts each pay period. People don’t miss the money because they never see it, so it’s much easier to reach your financial goals this way.
Pick up matching contributions from your employer
A new report from benefits firm Aon-Hewitt finds that 42% of companies are now offering employees a dollar-for-dollar match in their 401(k). That’s up from 31% of companies asked in 2013. (Prior to 2013, most companies were only doing 50 cents on the dollar.)
Some companies automatically enroll employees in their 401(k) plan. Among those companies, more than half are now setting 4% as the default savings rate. Four percent is a good start, but it won’t get the job done. If you want a really comfortable retirement, you’re going to need to save at least a dime (10%) out of every dollar you make.
Opt for target-date retirement funds
For those who are completely perplexed by investment choices, the smart option is to go into what’s called a target-retirement fund. With a target-retirement fund, you select the year that’s closest to your expected date of retirement and pop your money in. Then the fund’s manager allocates it for you.
So let’s say you expect to retire in 2045. Then you buy a 2045 portfolio and sit back. That’s it. It’s that easy. Over the next nearly 30 years, the company you choose picks a mix of stocks and bonds to get the best returns with the lowest overall risk. As as a general rule, your investments automatically become less risky the closer you get to 2045.
No mess, no fuss on your part. When you’re young, they have you heavily invested in stocks. Then as you age, you get less and less stocks and more bonds. It’s a classic investment model, but one that lets you take a ‘set it and forget it’ approach to investing.
Don’t tap into your 401(k) — ever!
According to Fidelity, nearly one in four people have a loan against their 401(k) right now. There are a lot of reasons why people may choose to borrow against their 401(k). But here are five reasons why you shouldn’t!
1. You’re likely to reduce or stop your contributions during payback. The Fidelity study says almost half of people who do a 401(k) loan reduce how much cash they stash for retirement while they’re repaying the loan. That’s because they’re struggling to make those payments back. And worse still, a third of people end up stopping contributions completely during their repayment time.
2. The ‘Hey, I’m paying myself back’ rationale isn’t so straightforward. When people do a 401(k) loan, they tend to justify it by saying, ‘Well, it’s my money. I’m paying myself back.’ But the thing is, you pay yourself back with after-tax money that then will be taxed again when you retire!
3. If you do it once, you may do it again. Once you take out your first 401(k) loan, what are the odds you’ll do another? Half. You have a 50/50 chance of this being a case of wash, rinse, and repeat, according to Fidelity.
4. The real cost is opportunity. Taking the long view, the stock market has a lot more up years than down years. So if you’re not as invested in the market because you’ve reduced or stopped your contributions during payback, you’re missing a lot of the gain that takes place over time.
5. The net effect is less for you in retirement. A 401(k) loan today means an enormous reduction in what you have to live on in retirement. So you’ll either have to work more years to make up for it or live a life that could put you in near-poverty during retirement.
So look at all the angles: You reduce your contributions, you pay yourself back with after-tax money that then will be taxed again when you retire, and a lot of people contribute nothing during that time period they pay back that loan.