Americans have often been accused of doing a poor job of planning for their financial needs in retirement. However, two new reports suggest workers are doing a much better job of saving and investing for the future.
Fidelity Investments this week released an analysis of contributions to individual retirement accounts by its customers. The report found that the average contribution rose from $3,420 in 2007 to $3,930 in 2011, an increase of nearly 15 percent.
“The historic market conditions over the last several years have jump-started many investors to take control of their personal economy and increasingly focus on saving for their retirement,” said Ken Hevert, of Fidelity.
He refers to the significant rebound in stock prices in the past three and a half years. On March 9, 2009, the Dow Jones Industrial Average had dropped to 6,547, losing nearly half of its value after peaking in October 2007. Since then, the index has rebounded to the current level near 13,120, an increase of more than 100 percent.
The Fidelity report not only finds that investors have added to their IRAs as the markets steadily recovered, but that they have also taken advantage of tax tools. Overall, nearly 63 percent of all IRA contributions have gone to Roth accounts, which allow assets to grow tax-free rather than tax-deferred, as is the case with traditional IRAs.
Investors in their 20s took advantage of the Roth IRA, with 84 percent of contributions going toward the tax-free accounts. They were willing to forgo the immediate deductability of their contributions for the long-term benefits of avoiding all future income taxes.
“With potential tax changes looming, including rate increases for income taxes, long-term capital gains and qualified dividend income, investors are looking for a wide range of strategies to prepare for a number of possible tax scenarios,” Hevert said.
Realizing income taxes may never be lower than they are now, a large number of Fidelity investors are doing Roth conversion — moving money from a traditional tax-deferred IRA to a tax-free Roth account — and paying any deferred taxes now to allow all future growth to be exempt from taxes.
Another report this week also suggests more workers will be taking advantage of their employer-sponsored retirement plans.
According to Schwab Retirement Plan Services, 73 percent of employers are once again matching a portion of the contributions to 401(k) plans by workers. That returns the matching participation to the levels before the recession in 2005. Matching had dropped as low as 67 percent in 2009.
In addition, more employers are automatically enrolling employees in their 401(k) plans. This year, 42 percent of employers enroll newly hired employees in the retirement plan, up from just 5 percent in 2005.
Bottom line, the more tools and information that workers have, the more likely they are to seriously save, invest and plan for their retirement.