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Retirement Accounts Swell but Not by Nearly Enough

·Senior Columnist

There’s so much gloomy news about the state of prosperity in America that any break in the clouds is cause for celebration. So let’s cheer for a moment one uplifting improvement in the retirement outlook for some Americans.

Yahoo Finance
Yahoo Finance

Fidelity, the big investing firm, reports that the average balance in the 401(k) retirement plans it administers hit a new record high of nearly $81,000 in the first quarter of 2013. That’s a 75% jump from the scary-low levels of March 2009, when the stock market bottomed out.

Older workers are in considerably better shape. The average 401(k) balance for people 55 and over who are still working rose to $255,000, Fidelity says. That’s a 95% jump from the dark days of early 2009, when workers watched in horror as the stock market sank daily and their retirement savings evaporated.

Woefully unprepared

The good news ends there, however, because Americans remain woefully unprepared for retirement. Even many of those Fidelity investors — which only include people who have worked for their employer 10 years or longer — are likely to come up short once they leave the workplace.

Part of the problem is that Americans still aren’t saving nearly enough. Those gains in the Fidelity plans appear to have come entirely from rallies in the stock and bond markets rather than from people socking more money away. Since the 2009 market bottom, for instance, the S&P 500 stock index has risen by 140%. Since that’s higher than the average Fidelity gain — and even the gain for older workers — it suggests many of those investors moved money into cash or other low-return investments, or even reduced the principal in their accounts. Whatever the case, few if any of those gains came from a big boost in savings.

In fact, Americans still haven’t gotten the message about the need to spend less and save more. The average savings rate is still a paltry 2.7%, when many financial advisers say prudent families should save 10% of their income or more. It’s obviously difficult to save money if you’re living paycheck-to-paycheck — or worse, unemployed — yet consumer spending has been rising by more than incomes lately, at the expense of savings.

A distressing picture

Meanwhile, the overall picture on retirement planning remains distressing. As a rule of thumb, a 20-year retirement period requires about $200,000 of savings for every $1,000 of monthly spending once you stop working (assuming an average annual return of 5% or so). A 30-year period requires about $270,000 per $1,000 in monthly spending. So a retiree who spends $3,000 a month for 20 years would need about $600,000 in retirement funds. If the same retiree lived for 30 years, it would take about $810,000. Somebody spending 30 years in retirement and spending $5,000 per month would require about $1.35 million.

Most Americans are tracking way below those thresholds, and they know it. The average savings of a 50-year-old is about $44,000, according to the Census Bureau. So the typical 50-year-old has to bank something like $500,000 or even $1 million during his final 10 or 15 working years, which is obviously not likely to happen. Not long ago, many home owners thought their house would count as a significant source of savings, but a grueling housing bust that slashed home values by 20% to 30% has changed that equation. (That isn't stopping some people from taking the risky move of tapping their 401(k)'s to buy a home.)

No wonder 49% of Americans say they’re not confident they’ll have enough money for retirement, which is the highest portion in at least 20 years, according to the Employee Benefits Research Institute. In 2007, just 29% of workers felt that way. The outlook could improve as the economy recovers and more people go back to work. Baby boomers are working longer, too, which has pushed the average age at which people retire from 57 two decades ago to 61. The typical worker now plans to stay on the job till the age of 66, according to Gallup.

But a tough economy can interfere with such plans, as many baby boomers who have lost their jobs well understand. Traditional retirement resources are threatened, too. One big budget issue that still hasn’t been tackled in Washington is the soaring cost of entitlement programs such as Social Security and especially Medicare. At a minimum, modest reforms are likely, and benefits will have to be trimmed at some point, lest Uncle Sam go broke.

So while it’s encouraging that some savers’ 401(k) plans have plumped up recently, most peoples’ retirement accounts are still far too lean. The cheering is officially over.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.