You’re killing it with your 401(k)—on autopilot
Even at companies that offer a plan, only about half of workers sign up for it, and fewer than 40 percent of all employers automatically enroll their employees, according to the Society of Human Resource Management. Generally the default employee contribution is 3 percent of salary, when it should be more than 15 percent, including both your contribution and your employer’s match, according to David Blanchett, Morningstar Inc.’s head of retirement research.
In the first quarter, 68 percent of the rise in savings rates of workers under age 30 was due to automated increases, Fidelity's analysis found. There was a 42 percent rise from a year ago in the number of millennial Individual Retirement Accounts that got contributions, and a 51 percent jump in the amount of contributions.
Overall, IRA balances gained 4.7 percent to reach an average of $98,100. The amount contributed to IRAs rose 38 percent from 2016's first quarter. Some of that jump could be courtesy of profit-sharing payouts, as well as boomers retiring and rolling over money from 401(k)s into IRAs or consolidating multiple 401(k)s into an IRA, Thompson said. Then there is the annual race to contribute to IRAs before the income tax deadline.
The number of people who contribute to both an IRA and a 401(k) rose by 9 percent, to almost 1.4 million. Among such two-fisted savers, the average combined balance rose to its highest ever: $273,600, a 4.9 percent gain from a year ago. That is likely due to employees switching jobs and moving their assets from a previous employer's 401(k) into an IRA.
Fidelity is seeing more people contribute to both 401(k)s and health savings accounts, or HSAs. That slice of savers grew 21 percent between 2014 and 2016.
Health savings accounts tend to accompany high-deductible health-care plans. For people with the cash flow to pay for health care out of pocket, money left to compound in the tax-deferred accounts can serve as stealth retirement savings, since an HSA is triple tax-free: You put pre-tax money into it , your gains compound tax-free, and you can withdraw from it without paying taxes as long as the withdrawals are used for qualified medical expenses.
Thompson has seen people who retire at 62 or 63 using an HSA to help bridge the gap until they are eligible for Medicare at 65. With retiree medical expenses now at about $260,000 for a couple, according to Fidelity, every bit of savings helps.