Retirement balances for midcareer workers have experienced a decline between 2019 and 2022, despite the gains on financial assets such as stocks during that period, according to recent research. However, financial experts have pointed out that the situation may not be as dire as it initially seems. This article will delve into the reasons behind this decline and explore the factors contributing to this trend.
The Center for Retirement Research at Boston College conducted a study analyzing triennial data from the Federal Reserve’s Survey of Consumer Finances. The study found that median combined 401(k) plans and individual retirement account balances for individuals aged 35 to 44 decreased from $63,500 in 2019 to $50,000 in 2022. It’s important to note that these balances were not adjusted for inflation, which reached a 40-year high in 2022, eroding the purchasing power of that money.
While midcareer workers experienced a decline in retirement balances, older age groups saw an increase during the same period. The study revealed that savings for individuals aged 45 to 54 jumped from $105,800 to $119,000, while those aged 55 to 64 saw an increase from $144,000 to $204,000. At first glance, this disparity seems counterintuitive since U.S. stocks showed a nearly 25% return between 2020 and 2022, and younger savers typically have a higher allocation to stocks due to their longer investment time horizon. On the other hand, investment-grade U.S. bonds experienced a 6.5% loss during this period.
The decline in retirement balances for younger savers is partially attributed to an increase in the share of Americans aged 35 to 44 who have access to a 401(k) plan at work. According to Anqi Chen, the assistant director of savings research at the Center for Retirement Research, new and young savers tend to have smaller 401(k) balances compared to more established savers. As a result, the inclusion of these individuals in the analysis brought down the median balances for the entire age group. The introduction of automatic enrollment by employers, as well as the implementation of auto-IRA programs in some states, has contributed to this increase in access to retirement plans.
Limited Access to Workplace Retirement Plans
Despite these positive trends, it’s important to acknowledge that nearly half of Americans still do not have access to a workplace retirement plan. The individuals who do participate in a 401(k) plan tend to represent the top 20% of the income distribution and are generally wealthier than the average person. This disparity further emphasizes the uneven distribution of retirement savings and highlights the need for policies that promote broader access to retirement plans.
Another potential explanation for the declining balances among individuals aged 35 to 44 is the rise in the percentage of households in this age group holding stocks in nonretirement accounts. According to Anqi Chen, this percentage increased from 14% to 20%, signifying a significant rise. However, it remains unclear if this increase resulted in a reallocation of savings from retirement accounts to nonretirement accounts. While holding stocks outside retirement accounts can still serve as a form of savings, it’s worth noting that retirement savings are typically locked up for the long term. Saving in nonretirement accounts may subject individuals to taxes that they would otherwise avoid in tax-preferred retirement accounts.
The decline in retirement balances for midcareer workers between 2019 and 2022 may seem concerning at first, but a closer analysis reveals the underlying factors contributing to this trend. Improved access to retirement plans, potential reallocation of savings, and the uneven distribution of workplace retirement plans all play a role in shaping the retirement landscape for different age groups. Moving forward, it is crucial to address these challenges and strive for equitable access to retirement savings opportunities for all individuals.