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Retirement balances for midcareer workers declined between 2019 and 2022, despite gains on financial assets like stocks during that period, according to new research.
However, financial experts said the loss is not as bad as it might initially seem.
According to a recent study from the Center for Retirement Research at Boston College, the median balance for people ages 35 to 44 in 401(k) plans and individual retirement accounts will decline from $63,500 in 2019 to $50,000 in 2022. In which triennial data from the federal government were analyzed. The Reserve has recently released the Survey of Consumer Finances.
The savers in the analysis spanned two generations: older Millennials and younger members of Generation X.
The CRR report analyzed the balance among working families with 401(k) plans. The balance is not adjusted for inflation, which will hit a 40-year high in 2022 and erode the purchasing power of that money.
Meanwhile, retirement balances for older age groups increased during the same period. The study found that 45 to 54-year-olds’ savings increased from $105,800 to $119,000, while 55 to 64-year-olds’ savings increased from $144,000 to $204,000.
Automatic enrollment creates multiple small accounts
At first glance, the falling balance among young savers does not make sense. According to the study, US stocks returned about 25% between 2020 and 2022, and young savers are more inclined towards stocks due to their longer investment time horizon.
Investment-grade US bonds declined 6.5% during that period.
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However, the decline in retirement balances for young families is partly for a good reason. The share of Americans ages 35 to 44 who have access to a 401(k) plan at work is expected to increase by more than two percentage points between 2019 and 2022, said Anqi Chen, assistant director of savings research at CRR and co-author of the study. happened. Report.
Because newer, younger savers tend to have smaller 401(k) balances, they’ve dragged down the average balance for the entire age group, Chen said.
The share of employers automatically enrolling new workers has gradually increased over the years, and some have also enrolled existing workers. As of June 30, fifteen states had also created so-called auto-IRA programs, according to the Georgetown University Center for Retirement Initiatives. The programs generally require businesses to offer a workplace retirement plan or facilitate automatic enrollment in a state retirement plan.
As more employers adopt retirement plans and auto enrollment, more people “who otherwise wouldn’t actively participate,” says David, a certified financial planner and head of retirement research at PGIM, the asset management arm of insurer Prudential Financial. Blanchett said. ,
Yet, nearly half of Americans do not have access to a workplace retirement plan.
Blanchett said workers who save in a 401(k) are not representative of the average American. Such savers are in the top 20% of the income distribution, he said, and are much wealthier than the average person.
More investors hold stocks in non-retirement accounts
Another possible explanation for the decline in balance among 35- to 44-year-olds: The share of these households holding stocks in non-retirement accounts rose from 14% to 20%, a “quite substantial” increase, Chen said. .
It’s unclear whether this will lead to an increase in cannibalizing savings in retirement accounts, Chen said.
This wouldn’t necessarily be bad, Chen said, because non-retirement money is still a bucket of savings.
However, retirement savings are typically locked away for longer periods, and people saving in non-retirement accounts may lose money to taxes that they otherwise would not lose in tax-advantaged retirement accounts, he said. .
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