Mar 3, 2014

It’s time again for the regular check-up on the state of retirement accounts in the US. Fidelity recently updated numbers for 2013, and while accounts have increased, the bottom-line still remains that the overwhelming majority of employees are still well underfunded for retirement.

The average 401(k) balance hit $89,300 at the end of the year, up 15.5% from $77,300 in 2012, according to an annual tally by Fidelity Investments. Most of the boost came from stock market gains as all three major stock indexes ended the year more than 20% higher.

People on the verge of retirement, ages 55 to 64 years old, saw their nest eggs grow to an average balance of $165,200 from $143,300 in 2012, Fidelity said. Savers with both a 401(k) plan and Individual Retirement Account managed by Fidelity had larger nest eggs, with an average balance of $261,400, up from $225,600 in 2012.

Even a balance of $261,000 is hardly enough for a comfortable retirement. And many Americans are much more woefully unprepared for retirement. A 2013 study by the Employee Benefit Research Institute found that nearly half of workers had less than $10,000 saved.

Here’s something I found interesting: part of the problem is that many workers are putting their retirement savings at risk when switching or leaving jobs by not rolling over the accounts to 401(k)s or IRAs. Of the roughly 800,000 workers with Fidelity accounts who left a job in the first nine months of 2013, 35% cashed out their 401(k) balances, as opposed to leaving the money in their former employer's plan or rolling it into a new 401(k) or IRA. While Fidelity said the statistic was "concerning," it was not a significant increase from previous years.

These cash-out balances averaged $15,500, and were especially common among young and low-income workers. More than 40% of participants between the ages of 20 and 39 and 50% of workers earning between $20,000 and $30,000 had opted for the cash. Unless workers use the funds to open an IRA account within 60 days, they get hit with significant taxes and a 10% penalty.

Ultimately this makes it harder for their savings to grow. For example, a 30-year-old who cashes out $16,000 could lose nearly $500 in monthly retirement income, assuming she retires at 67 and lives to the age of 93, Fidelity said. Plus, the 30-year-old would be hit with $3,200 in taxes and another $1,600 in penalties at the time she cashes out.

Such an impact is why it never hurts to reiterate that, especially for young savers with years of potential investment gains ahead, it is important to save, and save often. Though personal financial situations will be different for everyone, one literally can’t afford not to sock away for retirement.