2017 was a good year for the stock market in the US, with the S&P 500 index rising 22 percent and the Dow Jones industrial average up 25 percent. This bull market has led to a spike in the value of Americans’ retirement savings accounts, which sounds like good news for the retirement readiness of the US workforce. However, Todd C. Frankel and Thomas Heath point out at the Washington Post, these huge gains are inspiring many working Americans to dip into their 401(k)s and IRAs at a hefty penalty to fund big-ticket purchases:
“I’ve seen more money requests for extraneous items in the last six weeks than I have in the last five years,” said Jamie Cox of Richmond-based Harris Financial Group, which manages $500 million in savings for about 800 middle-class families. … Cox said he is seeing more people take larger withdrawals, $20,000 to $40,000, to fund dream vacations or home improvement. …
The average annual return for 401(k)s hit 15.7 percent by the third quarter of 2017, according to Fidelity. And for most Americans, it’s these retirement accounts — 401(k), 403(b), SEP and IRA — that provide the closest evidence of a revving stock market. Retirement assets — including annuity reserves, pensions, and defined contribution plans such as 401(k)s and IRAs — exploded in the United States from $11.6 trillion in 2000 to $27.2 trillion as of Sept. 30, 2017, according to the Investment Company Institute, which represents the mutual fund industry.
In some cases, the early withdrawals financial planners are seeing reflect an irrational belief that the good times will roll on long enough for their retirement accounts to make back the money they are taking out. For others, however—especially workers approaching retirement age—the impulse to cash out comes from a fear that the stock market is overvalued and a crash is on the horizon that will wipe out their savings if they don’t get out in time.
Research suggests that most US employees harbor major misconceptions about retirement: how investment vehicles work, how much money they will need in retirement, and where that money will go. The possibility of employees making risky choices with their retirement savings underscores the need for better communications from employers about retirement plans. (CEB Total Rewards Leadership Council members can find out more here about how to encourage greater employee participation in retirement savings programs through better communication.)
Notwithstanding the recent boom, retirement accounts in the the US remain woefully underfunded overall, Frankel and Heath note, citing data from the Center for Retirement Research at Boston College showing that the median retirement savings account balance of a US household approaching retirement age was just $135,000 in 2016. A report last July found that American companies were investing significantly less in their employees’ retirement than they did at the turn of the millennium, and even some former proponents of 401(k) plans now believe that the shift from defined-benefit pensions to defined-contribution schemes has made it more difficult for Americans to retire.
On the bright side, US companies have been increasing their contributions to their employees’ 401(k) plans in the past few years and many plan to parlay their tax savings into increasing them further. Also, many Americans intend to work past the traditional retirement age and many others are coming out of retirement and re-entering the workforce, not necessarily because they can’t afford to retire but rather because they are expecting to live longer lives and don’t want to lose the financial, social, and cognitive benefits of holding a job.