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Hello everybody and welcome to another episode of EricksonTV, Curtis here with Lauren. This
article was discussing the current affairs of the 401(k) balances and it comes from Fidelity
which is one of the larger custodians of 401(k) plans. It was published in Thursday's USA
Today. The title is "Average 401(k) balance soars," so it sounds positive. Back in 2009
of course when the market was low the average 401(k) balance was about $46,000 and now at
the end of 2013 it's up to a record $89,000 according to per participant. That sounds
good initially and just in 2013 alone that was a 15.5% increase.
But when you start reading the numbers there are a couple alarming things. They say that
78% of that increase comes just from market growth and only 22% was from actual contributions.
The more disturbing thing is that in the year 2013 alone more than 35% of all 401(k) participants
cashed out their accounts. And that number is even higher for participants age 20 to
39. So what they're saying is that the average 401(k) that was cashed out, and it usually
happens during job changes, was a little over $16,000.
And here is the message for today, we always talk about working with an advisor to help
eliminate the great mistakes and it only takes one or two big mistakes to really devastate
your retirement. They're saying that the average younger investor that is maybe 30 years old,
for instance, might be looking at it like $16,000 they can use to pay down debt or whatever.
But what they don't realize is that if they kept that invested, in retirement that could
work to $461 in monthly retirement-income. The other bad thing and we know about this
with our tax background, is that you're paying an average of $3,200 in federal taxes and
another $1,600 in early-withdrawal penalties.
Yes, I was just doing a financial planning meeting with someone who is a little younger
than me, so in his early 30's, and we were talking about 401(k) plans. He was talking
about how he didn't want to save his money because it hurts to save it and not be able
to touch it for all these years. So I did this thing in Excel where I showed him that
if he made x% per year and he kept putting $5,000 every year where he would end up. And
after 10 year you end up in a very similar situation to how much you put in. If you put
in $5,000 every year, I think in the example I showed him, you would end up with $80,000.
After 30 years if you put in $5,000 every year, you put in $150,000 total, and you would
end up with over $400,000. I used real returns. And that was a real eye opener for him.
Basically you can either start saving when you're young or you can save a huge percent
of your income when you're older. Those are your two choices. And if the second choice
is what you want to do that's fine but I don't think most people are really thinking that
through or making that decision. They're just thinking, "I can use this money right now."
There's a contradiction too with the youth of the world. We're starting to work with
a lot younger investors, thankfully, now which I think is good. Now I'm generalizing here
and this isn't for everybody but a lot of them are cynical about there being Social
Security for them but at the same time they are cashing out their 401(k) balances. So
how are they going to have a retirement? That's a very good questions and I think maybe some
of that cynicism is just an excuse to not think about it or put it off.
I don't want this to come off as self-serving but a lot of these 401(k) plans are being
set up purely looking at expense ratio and people are not working with advisors. It's
more do-it-yourself type planning and I think that's encouraging or facilitating these big
mistakes. That to me, and I think you agree with this, is the reason to work with an advisor
like us. We want to help you avoid these great mistakes. So for our clients who are watching
this, if you can influence a child or a grandchild or a neighbor, encourage them to get planning
and hopefully that will help avoid these great mistakes. Thank you very much for watching
this episode of EricksonTV. We'll see you next time.