Tips to Boost Retirement Income

In its most recent analysis of 401(k) retirement accounts, Fidelity Investments found that saving just a small amount more each month can positively affect retirement income.

The Fidelity analysis found that, at the end of the second quarter, the average 401(k) balance remained relatively steady over the previous quarter, ending at $80,600—up nearly 11% from $72,800 during the second quarter 2012. For workers who were continuously employed and in a 401(k) plan for the last 10 years, the average balance rose to $211,800, which was up nearly 19% from a year ago. In addition, the analysis found that, for the past four years, more employees have increased their 401(k) deferral rate than decreased it.

“While it’s a good sign that some workers are increasing their savings for retirement, many younger workers—especially Millennials—aren’t saving at the recommended 10% to 15% of their income,” said James MacDonald, president of Workplace Investing at Fidelity Investments. “It is critical young workers realize that even the smallest increase to their monthly savings today or just 1%, whether in a 401(k) or an IRA, could have a meaningful impact on their retirement paycheck down the road.”

To illustrate the impact of increasing 401(k) savings by just 1% a month, Fidelity prepared two hypothetical scenarios as part of its analysis. The scenarios examined what the added savings could translate into, in terms of retirement income for an individual who begins saving at either age 25 or 35, and then retires at age 67.

The two scenarios illustrate both the current “cost” and the impact a sustained 1% savings increase could have on this person’s retirement paychecks, using two different investment return rates—5.5% and 7%. The “costs” of $33 and $50—i.e., the additional 1%—at ages 25 and 35 respectively are assumed to grow along with the individual’s salary at 1.5% per year until his retirement age of 67. The results for the 25-year-old would be an extra $200 for the 5.5% rate and an extra $330 for the 7% rate. In the case of the 35-year-old, it would be an extra $180 and $270, respectively. The scenarios showed that the impact was greatest for those with a longer savings time horizon.

The analysis also examined two scenarios of saving an extra $50 a month in an IRA. For a participant who started saving at age 25 and retired at age 67, saving an extra $50 in an IRA with a 5.5% rate of return could potentially generate an extra $230 a month and $390 a month at a 7.7% rate of return. For someone using the same parameters but starting at age 35, the results would be an extra $140 and $220, respectively. Again, the analysis supported the positive impact of starting to save sooner rather than later.

More information about the Fidelity analysis can be found here.