In a bit of promising news for U.S. retirees, Fidelity released a report this week detailing a record number of 401(k) and IRA millionaires in the U.S. Fidelity estimates that the number of U.S. workers who now have more than $1 million in their 401(k) or IRA to be at approximately 375,000. Due to a decade-long bull market in stocks and a low unemployment rate, more workers than ever have been able to accumulate substantial assets in their retirement accounts. Further, the average employee contribution rate in the U.S. now stands at 8.8%, a significant improvement over the past.
Even for wealthy families, the benefits of funding a pre-tax retirement account are very real. In 2019, each individual worker can contribute up to $19,000 to their 401(k). In addition, anyone over 50 is eligible for an additional “catch up” contribution of $6,000. With employers typically making contributions as well, annual contributions can become meaningful to even high net worth financial plans. The 2019 limit for employee and employer total contributions to a 401(k), for those 50 and over, is $56,000.
Tax deferral is one of the biggest potential advantages for high net worth families. If a family is at the higher end of the income tax brackets, the marginal tax rate when including Federal and State income taxes is above 40%. By deferring tax payment until retirement, families will realize taxable income at a time when they have much greater control over their earned income. The Retirement Tax Filter™ is one of our most utilized proprietary tools and one that fits well in this analysis. A common and effective method to saving on income taxes is to defer as much as possible when earning income at the highest marginal tax rate.
What is less promising is that many Americans will still struggle to retire successfully, despite the success of those who have saved substantially in their investment accounts. The Fidelity report highlights the average 401(k) balance for U.S. workers, which stands at just above $106,000. The Boston College Center for Retirement Research estimates that close to 50% of Americans face a “high risk” of financial hardship in retirement. Though Social Security payments provide an additional income stream for retirees, the standard of living for underfunded workers can be lower than expected.
The ramifications of a well-funded retirement have wide-reaching consequences for the economy. Consumer spending in the U.S. drives approximately 70% of GDP activity. Consumer spending remains robust in 2019, keeping the economic growth close to a 2% annualized level. Improved U.S. personal balance sheets are no doubt part of the increased spending equation, though the actual correlations are more difficult to pin down. The so-called “wealth effect” of an increase in investment values leading to increased consumer spending has been debated extensively in academic research, though the general consensus is that there is some positive impact from higher market values.
It is encouraging to see the broader trends of more 401(k) millionaires in the U.S. today. As part of a broader financial plan, the use of qualified investment accounts remains an important piece of the puzzle—even for high net worth families and earners.