Your workplace retirement account can play a critical role in your overall retirement strategy. However, some have gone further with the accounts than others, especially recently.
CNBC reported that 401(k) accounts are at all-time highs, with some even joining the much-desired “three comma club” of 401(k) millionaires. Average 401(k) balances jumped 24% from the previous year to $129,300. Also on the rise were overall contributions, with 12% increasing their contributions since last year and 37% of employers adding new employees into workplace plans. The study discovered a record 412,000 401(k) plans with million-dollar balances. Overall Individual Retirement Account (IRA) millionaires reached 342,000, another record.1 The numbers do not address other defined-contribution plans such as 403(b) primarily offered to educators and healthcare employees.
Some of this represents a correction from 2020 as well as a reaction to the economic uncertainty created during the early days of the global pandemic. No doubt some was the result of "helicopter cash" from the government along with a positive market. People were forced to reevaluate their cash flow and emergency funds as well as to rethink their retirement needs. Many made the wise decision to take advantage of employer matches, wherever available.
It also reflects businesses need to entice employees. Even some restaurants and franchises are offering 401(k) plans to their workers these days in a bid to maintain staffing levels year-round.1
Few things are more successful at saving for retirement than grabbing the money before you can spend it. That salary reduction method makes it painless -- you don't miss it -- and automatic. However, it may make you complacent. Remember, you have a partner on those accounts.
As many of you know, we advocate contributing whatever it takes to capture your employer's matching funds. These are "free dollars" that should be available to offset your silent partner's share when you start spending the funds: Uncle Sam's cut, income taxes on the whole account, both principal and growth. What that fee will be, we can only speculate. I am betting definitely "higher than today."
We do not generally recommend contributing funds beyond the company match -- not because we want to reduce your saving, but because we usually find there are better places to put those extra dollars to help you maintain their use, control, and availability. We also do not find it prudent to have all or even most of your retirement dollars in a single vehicle.
What does this mean for your overall retirement strategy? I'd be happy to talk to you about this and the many other choices open to you at your earliest convenience.
1. CNBC.com, August 19, 2021
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August 31, 2021