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More millionaires are among us thanks to ballooning 401(k), IRA balances
Yahoo Finance
Kerry Hannon
August 29, 2024 at 2:00 AM
The number of 401(k) millionaires reaches new record: FidelityScroll
back up to restore default view.
A growing number of retirement savers are sitting on a cool million or
more in their IRAs or 401(k)s.
IRA account holders at Fidelity with $1 million or more saved jumped to
398,594 at the end of June, up from 376,275 at the end of the first
quarter, according to Fidelity Investments.
That nearly 6% bump is significant. It’s more than double the uptick in
those with seven-figure balances in Fidelity 401(k) plans.
There were 497,000 millionaire retirement savers in Fidelity 401(k)
plans at the end of the second quarter, up from 485,000 at the end of
March — a 2.5% increase.
Fueling the bulging balances in retirement accounts was another robust
quarter of market returns and consistent contributions, Rita Assaf, Fidelity’s vice president of retirement products, told Yahoo Finance.
Savers were able to hit this lofty level by starting early and
contributing consistently over many years, she said.
Total average 401(k) savings rates, for example, held steady from
earlier this year at 14.2%, a combination of employee and employer
401(k) contributions.
The rising IRA balances, however, are noteworthy because that's money
people are saving and investing on their own, without the help of employer-matching funds.
Read more: These are the new traditional IRA and Roth IRA limits in 2024
DIY saving, not necessarily by choice
Roughly 1 in 6 workers are not offered any retirement benefits, with a significantly higher percentage among Generation Z (20%) and baby
boomers (30%), according to a recent report by the Transamerica Center
for Retirement Studies.
“That’s a real concern and demands a do-it-yourself approach when it
comes to saving and investing for retirement,” Catherine Collinson, CEO
and president of Transamerica Institute, told Yahoo Finance. "Without an employer and employer-sponsored retirement benefits, it’s easy to do nothing,” she said.
You can open any of these retirement accounts through your local credit
union or bank. Mutual fund companies and brokerage firms are also good
places to do so. An IRA is easy to set up online: Enter your bank
details, how frequently you want to invest, and the amount you want to
transfer into your IRA.
Also, some states offer IRA programs that are open for self-employed
people. These include Oregon, Colorado, Connecticut, Maryland, Illinois, California, and Virginia.
At Fidelity, 12.3 million people are saving and investing for retirement through 15.8 million IRAs, where the number of accounts rose 11.7% and
total assets jumped 22.2% between the second quarter of 2023 and the
second quarter of this year.
Read more: Retirement planning: A step-by-step guide
Have a question about retirement? Personal finances? Anything
career-related? Click here to drop Kerry Hannon a note.
The new IRA millionaires
The average age of the IRA-created millionaire is 68, compared to 59 for
a 401(k)-created millionaire, Assaf said.
Even so, many of Fidelity's IRA millionaires are Gen Xers reaching their
peak earnings years. Some are even overtaking boomers, she added.
Gen X had a 30% increase in total IRA contributions over the past year,
with their current contributions the highest they’ve been in the last
five years, according to the analysis.
IRA investors can opt for a traditional IRA for the up-front tax break. Contributions to traditional IRAs are often tax deductible, but
withdrawals years later in retirement are taxed at the same rates as
ordinary income, like wages.
Another choice is a Roth IRA, which has no deduction today, but when you
pull the funds out, the withdrawals are tax-free.
Eligibility to contribute to a Roth IRA is based on your income. For tax
year 2024, the limits are between $146,000 and $161,000 for single
filers and between $230,000 and $240,000 for joint filers.
For 2024, the total you can contribute to all of your traditional IRAs
and Roth IRAs can't be more than $7,000, or $8,000 if you're age 50 or
older.
If you’re self-employed, you can also put more of your income away by contributing to a Simplified Employee Pension plan, or SEP IRA. The contribution limit for a SEP IRA for 2024 is 25% of your compensation or $69,000 — whichever is less.
Most of the total balance for IRA millionaires is held in traditional
IRAs, Assaf said. The reason: people converting workplace plans like
401(k)s into IRAs.
Shot of a young man going for an ocean cruise on a boat
Many of Fidelity's IRA-created millionaires are Gen Xers reaching their
peak earnings years. (Getty Creative) (kupicoo via Getty Images)
The importance of contributing
While not all account holders contribute to their IRA on an annual
basis, the number of Fidelity IRA accounts with a contribution increased
by 31% between the second quarter of 2023 and the second quarter of this
year.
Regular contributions matter because you are steadily adding funds to
your accounts regardless of whether the market is soaring or sliding.
That has a cumulative impact critical to building wealth.
The average savings tenure of Fidelity account millionaires is more than
two decades. What that says is that it pays to press on and invest
steadily over the long term.
“The key to saving for retirement is playing the long game and
maintaining consistent contributions over time," Michael Shamrell, vice president of thought leadership for Fidelity Workplace Investing,
previously told Yahoo Finance. “The majority of these savers aren’t necessarily doing anything special other than saving at a high rate in
the same plan over a long period of time.”
Across generations, Roth IRAs are the retail retirement savings vehicle
of choice, with 65% of all new IRA contributions going to Roth. Roth
IRAs among Gen Z investors — those born between 1997 and 2012 —
increased 66% in the last year.
“What we observe is that IRA-created millionaires represent a
combination of workplace savings (rollovers) or transfer of assets
(think moving an IRA from another provider), as well as people simply continuing to contribute and making sure they are investing so their
money grows,” Assaf added.
I second that emotion. Ultimately, it's up to you to invest in your
future and to get serious about doing so.
smart asset
smart asset
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including "In Control
at 50+: How to Succeed in The New World of Work" and "Never Too Old To
Get Rich." Follow her on X @kerryhannon.
Click here for the latest personal finance news to help you with
investing, paying off debt, buying a home, retirement, and more
Read the latest financial and business news from Yahoo Finance
Retirement investors face a multitude of risks in making decisions about
their portfolios. Fluctuations in market returns, especially to the
downside, are usually top of mind for retirement savers. These
short-term fluctuations in stock and bond prices are usually the
simplest to deal with. Maintaining a diversified portfolio through
market and economic cycles will generally enable investors to earn
returns that offset another significant risk facing retirees –
inflation. Inflation, usually slowly, eats away at the purchasing power
of a retiree’s nest egg. Even low inflation rates make household budgets
look ridiculously large when viewed over the course of a 30 year or
longer retirement. Longevity risk, or the risk that one outlives the
ability of their portfolio to support their cash flow, is also a key
concern of retirees and the number one reason they engage in retirement planning to begin with.
Often, retirement planning focuses on average investment returns, but
this can be very misleading. US large company stocks have seen an
average return of about 10% over the last 30 years, but the deviation of
daily, monthly, and even annual returns was significant. Because of this
return variability, retirees who earned the same average return could
see vastly different retirement outcomes depending upon when the good
and bad returns occur during their retirement. This is called sequence
of returns risk, and it peaks in the early retirement years, then
becomes a bit less important than inflation and longevity risks as
retirees age.
The reason the timing of the good versus bad returns matters so much to
a retiree is that they need to be sure that their portfolio is large
enough and invested to withstand declines in value caused by withdrawals
in addition to declines caused by market volatility. Negative return
years occurring just as retirement withdrawals are starting can trigger
too much of a drawdown, leaving a portfolio unable to recover enough to
support withdrawals for the retiree’s expected life span. Studies on
sequence of return risk show that poor returns early in retirement lead
to dramatically lower ending portfolio values compared to retirement
portfolios that experience high returns in the early years even if the long-term average return of the portfolios is the same. A recent study
by Dr. Craig Israelsen of Utah Valley State University pointed out that,
even when using a broadly diversified, twelve asset class portfolio, a
5% starting withdrawal rate adjusted for inflation by 3% annually, a
portfolio in which the highest returns in the 1999 – 2023 period
occurred last in the sequence significantly outperformed the actual
return sequence. The portfolio in which the worst returns occurred early
in retirement was tapped out in 10 years.
We would expect different results in different periods, but the same
general conclusion would emerge. Early in retirement, it pays to focus
on minimizing downside risk to reduce the likelihood that large negative returns will compound the eroding effect of withdrawals. This can be accomplished by implementing a more conservative asset allocation during
the first five or so years of retirement. One effective way to do this
is to have at least one year of planned retirement withdrawals in cash
before the last paycheck arrives. Reducing exposure to stocks to about
40% of a portfolio will also help tamp down volatility.
The downside to a smaller equity allocation is that it reduces the portfolio’s ability to generate inflation-beating returns. Over the long
run, stocks have proven to generate returns that significantly out-pace inflation. For this reason, retirees may need to turn the tired rules of
thumb about asset allocation on their heads as they age. Determining
your percentage allocation to stocks by subtracting your age from one
hundred makes little sense. This would leave an 80-year-old with a 20% allocation to equities at a time when inflation is likely to erode more
of her portfolio value than withdrawals or negative returns.
Increasing a retirement portfolio’s allocation to stocks is the opposite
of the glide path ingrained in most target-date portfolios. Generally,
these portfolios hit 60% stocks at the target retirement date, which may
overly expose retirees to sequence of return risk, then they become more conservative, potentially compounding the negative impact of withdrawals
when negative returns occur simultaneously. Consequently, it may be
beneficial for a retiree to abandon their target-date fund for a more customized portfolio early in retirement.
David Mayes
David Mayes
David T. Mayes is a CERTIFIED FINANCIAL PLANNERTM professional and IRS
Enrolled Three Bearings Fiduciary Advisors, Inc., a fee-only advisory
firm in Hampton. He can be reached at (603) 926-1775 or
david@threebearings.com.
This article originally appeared on Portsmouth Herald: Money Talk:
Sequence of returns risk should guide allocation heading into retirement
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