401(k) Plans Recover Losses, but Still Fall Short

Stock Market gains are pulling up balances in 401(k) retirement plans, but a growing coalition of advocates and analysts fear many Baby Boomers will outlive their nest eggs.

Average 401(k) balances reached a record high of $71,500 at the end of 2010, Fidelity Investments reported Wednesday. Fidelity, the nation’s biggest provider of retirement plans, noted that investors who participated in the employer-sponsored plans for ten years had an average balance of $183,100.

The positive report, announced in the middle of America Saves Week, is tempered by research that shows a growing number of Americans are at risk of running short of money in retirement. America Saves Week is a national campaign involving more than 1,000 non-profit, government and corporate groups that encourages households to save and build wealth.

Many workers cut contributions to retirement accounts during the recession, and some were forced to take costly early withdrawals from their accounts. Decreased savings, high unemployment, falling homes prices and uncertainty about the future of Social Security, all cloud the retirement outlook for the Greatest Generation. Higher taxes, rising health care costs and inflation also threaten to erode retirement income.

The Recession has increased the risk of running out of money during retirement for an additional 4 percent to 14 percent of Americans, reports the Employee Benefit Research Institute. These investors would have been able to cover basic retirement expenses had they not suffered a combination of declining home values, decreased savings rates and losses in retirement plans.

“The impact of the 2008/2009 financial crisis affected people in many different says,” said Jack VanDerhei, director of research at EBRI, a nonprofit research group. The report says BabyBoomers nearing retirement would have to save an average of 4.3 percent more each year to have a 90 percent chance of paying basic expenses in retirement.

“With diminished assets and an aging population, Americans will want to save more,” states the Campaign for Economic Security, sponsored by the think tank PostPartisan. The group reports that nearly half of U.S. workers have less than $10,000 in retirement savings. Many lower-income families count their house as their only financial assets and are particularly vulnerable to continued weakness in the housing market. Women are also more at risk of becoming impoverished in retirement because on average they live longer, according to recommendations from WISER, the Women’s Institute for a Secure Retirement.

Despite a pressing need, retirement investment remained flat or dropped slightly for most investors during the recession, reported the ING Institute for Retirement Research last November. A manual called In It for the Long Run?, released by ING in November, compares preparing for retirement to training for a marathon. ING found that employees view the 401(k) plan as an important to their retirement savings, but fewer than 20 percent of employees contribute 10 percent or more of their salary to 401k plans. More than 90 percent of employees who invest less than the maximum say they could probably save more. Most would increase savings by cutting back on dining out or scaling back on vacations and other luxuries. Nearly one-fourth said they would have to work overtime or take on another job to be able to save more.

Employees racing retirement have many fears, but at the top is the prospect of having to ask their children for money, ING said. Medical expenses rank as the second most pressing concern, and 10 percent fear having to move from their home.

ING found that investors with 401(k) plans are also likely to have IRA accounts, CDs, savings accounts and stocks and bonds. Spectrem Group has found that Mass Affluent Investors are more likely to have IRAs than 401(k)s, but the 401(k) account have larger balances. Eighty-three percent own IRAs with an average balance of $115,070, while 65 percent have a 401(k) or comparable employer-sponsored defined contribution plan with an average balance of $130,120. Ninety-four percent invest in cash products such as CDs and have a cash balance of $76,470.

Consumer Advocates encourage investors to boost retirement savings by contributing as much as possible to employer-sponsored retirement plans, such as a 401(k), which reduce taxable income, allow investments to grow tax-deferred and often involve a matching contribution from employers. They also recommend investing this year’s 2 percent reduction in Social Security taxes into a retirement account. Investors can use retirement calculators to predict what their income will be when they stop working. Advisors say retirees typically need 70 percent to 85 percent of their working income to meet their financial needs in retirement.

Retirees falling short of their goals might consider:

• Moving to an area with a lower cost of living and lower taxes.
• Deferring withdrawal of social security payments to increase the monthly payment.
• Working part-time through retirement.