The overall balance in 401(k) accounts at the end of the year were down by 23% compared to the previous year. They were at $103,900, according to a recent report by Fidelity Investments, which is the United states’s largest provider of 401(k) plans and manages over 35 million retirement accounts.
Retirement savers faced a difficult year due to challenging economic conditions, and as a result, their savings were impacted. While the average balance in 401(k) accounts increased in the last quarter of 2022.
Similarly, the average balance in individual retirement accounts (IRAs) also decreased by 20% in the fourth quarter of 2022, reaching $104,000.
How 401(k) will be beneficial in 2023?
The Fidelity and Vanguard reports highlight the significant challenges faced by retirement savers in the year 2022. Despite the ongoing economic hardships caused by natural disasters and geopolitical events, most Americans continued to contribute to their retirement savings.
However, average 401(k) and individual retirement account (IRA) balances saw significant declines, with balances falling by 23% and 20% year over year, respectively.
Despite these challenges, Fidelity found that most retirement savers continued to contribute to their 401(k) plans, with the average contribution rate steady at 13.7%. This is only slightly below Fidelity’s suggested savings rate of 15%.
The low percentage of plan participants with an outstanding 401(k) loan, at 16.7%, is also a positive sign. However, it is important to note that borrowing from a 401(k) plan should generally be avoided, as it can result in the loss of compound interest and negatively impact long-term retirement savings.
Recent trend for 401(k) savings option in the US
The Vanguard report revealed that an average 401(k) balance is decreasing by 20% to $112,572, and hardship withdrawals are ticking up slightly. Additionally, the depletion of emergency savings was noted in other research, with at least one-third of adults reporting having less savings than a year ago.
These trends have increased concern among retirees about their financial security, with nearly half believing they will outlive their savings. The current economic uncertainty and volatility only exacerbate this concern. However, Fidelity’s Vice President of Thought Leadership advises people not to let short-term economic events derail their long-term retirement savings efforts.
These reports highlight the need for individuals to proactively manage their retirement savings and explore all options before tapping into those savings. As the economy continues to face challenges, retirement savers must remain vigilant and seek professional guidance to ensure they can meet their long-term financial goals.
The main difference between an IRA and a 401(k) is that a 401(k) is employer-sponsored, while an IRA is an individual account. 401(k)s generally have higher contribution limits, employer matches, and more limited investment options, while IRAs offer more flexibility and control over investment options.