The Center for Retirement Research at Boston College has reported that the average combined 401(k) and IRA balances for 35- to 44-year-olds decreased to $50,000 in 2022 from $63,500 in 2019, even though 401(k) availability increased for these workers over the period of three years. Additionally, stock ownership within nonretirement accounts also rose.
Despite a rise in financial assets like stocks between 2019 and 2022, retirement balances of middle-aged workers fell. The Center for Retirement Research at Boston College conducted a study on the Federal Reserve's Survey of Consumer Finances, which revealed a median combined 401(k) plans and individual retirement account balance of $50,000 in 2022 for those between 35 and 44; this is a drop from the $63,500 reported in 2019. Those analyzed in the study include both older millennials and younger members of Generation X. Although the results can seem disheartening, financial experts point out that it may not be as bad as it appears.
The CRR report evaluated balances among working households with a 401(k) plan. Not taking into account inflation, which rose to its peak in four decades in 2022 and reduced the value of the money, the analysis showed an increase in retirement balances for age groups 45-54 and 55-64, respectively to $119,000 and $204,000 from $105,800 and $144,000 during the same period.
At first, it may seem counterintuitive that retirement savings among younger individuals is decreasing. This is especially true as U.S. stocks saw a 25% return between 2020 and 2022 and those with longer investment horizons tend to be more heavily invested in stocks. Nevertheless, a closer look at the data reveals that this is partly because of a positive trend: the number of Americans ages 35 to 44 with access to a 401(k) at work grew by more than two percentage points from 2019 to 2022. This is attributed to employers gradually taking up retirement plans and auto-enrollment. Consequently, this age group also saw an increase in those who would not otherwise save. According to David Blanchett, a certified financial planner and head of retirement research at PGIM, the influx of younger savers with low balances, and the resulting decrease in median balances, is due to this influx of new participants.
Yet close to half of US citizens don't have an office retirement program accessible to them. Blanchett noted that the individuals who do put resources into a 401(k) are not typical of the general American population. Those saving money in this manner are positioned in the top 20% on the earning scale and are much wealthier compared to the regular person, he added.
The share of 35- to 44-year-old households owning stocks in nonretirement accounts surged to 20% from 14%, a "significant" jump, stated Chen. It is uncertain whether this ascent depleted savings in retirement accounts, she pointed out. Nevertheless, Chen noted that it might not be negative since nonretirement funds are still a form of savings. Nevertheless, retirement savings is typically put away for the long haul, and those who stash away money in nonretirement accounts could be subject to taxes that they wouldn't face in tax-advantaged retirement accounts, she added. Don't miss these stories from CNBC PRO: Five stocks to purchase before the year-end suggested by the experts; Morgan Stanley fund manager names 4 top stocks to buy 'on the cheap'; JPMorgan picks China stocks to buy now. Alibaba's not on the list; Analysts are bullish about this self-driving car tech stock, forecasting over 400% upside.
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