Fidelity Investments, the largest provider of 401(k) plans in the country, said Thursday that 401(k) average balances are at an all-time high, rising 18 percent from a year ago to $75,900 at end of the third quarter -- the highest since the company started keeping track 12 years ago.
The average annual employee contribution to a 401(k) rose 7.3 percent over the last five years to $5,900 in the year that ended Sept. 30, according to Jeanne Thompson, vice president of market insights at Fidelity. Over the same time period, employer contributions rose 19 percent to an average of $3,420.
In the last year, improved investment returns accounted for 74 percent of the growth, while increases in employer and employee contributions accounted for 26 percent. Thompson says that employers do their employees a big favor when they automatically enroll them in 401(k) plans because more than 90 percent of automatically enrolled employees stay in the plan and keep saving.
The average employee, according to Fidelity, saves 8 percent of his salary, although Fidelity recommends saving 10 percent. Nevertheless, today's news represents an encouraging trend. "We see that for many people, the 401(k) is the primary retirement savings vehicle, and they are increasingly committed to saving in them," Thompson says.
Let's do a little retirement planning arithmetic, using the Bankrate.com 401(k) savings calculator. Let's say you make $30,000 at age 25 and you work steadily, getting a 3 percent annual raise until you retire at 67. You save 8 percent a year, getting a 50 percent employer match on 6 percent of your salary. By the time you retire, you'll have more than $1.1 million, assuming a 7 percent annual rate of return. If you up your contribution rate to 10 percent, you'll have almost $1.4 million. Using the rule that says that you can safely withdrawal 4 percent a year from your retirement accounts, that gives you about $55,000 a year in spending money. Add that to Social Security, and life in retirement could be comfortable.