Fidelity reports record 401(k) balances, but are they enough?

(MoneyWatch) A surging stock market is credited for boosting average 401(k) balances to all-time highs, Fidelity Investments recently reported. While this is certainly good news, employees shouldn’t rest on their laurels and assume they can lighten up a bit when it comes to their retirement savings plans. If they want a better shot at a financially secure retirement, they’ll need to stay vigilant by continuing to save as much money as possible in their 401(k) plans, not panicking and selling equities during market downturns, and avoiding "leakage" due to loans or early distributions.

Fidelity recently reported that its average 401(k) balance at the end of the 2013 third quarter was $84,300, up 11 percent from a year ago. For all employees who were continuously active in their 401(k) plans for the past 12 months, the average account balance was $223,100. And for pre-retirees age 55 or older who were continuously active in their 401(k) plans for the past 12 months, the news was a little better: The average account balance was $269,500.

These last two figures are close to opening table stakes -- $250,000 -- for a minimally comfortable retirement, provided retirees make optimal decisions regarding their Social Security benefits and how to deploy retirement savings to generate retirement income. This amount of savings can generate a retirement income ranging from $7,500 to $15,000, depending on the method used to generate retirement income

To these amounts, retirees would add Social Security income; the average incomes for new retirees in 2012 were a little more than $15,000 for a single retiree and $21,000 for a married couple.

But retirees can significantly boost their Social Security benefits beyond these averages by delaying benefits until age 70. If they need to draw on their 401(k) savings to enable this delay, that’s a better move than starting both Social Security and withdrawals from a 401(k) plan at an earlier age. 

Employees also need to avoid making poor financial management decisions that cause money to leak out of their accounts before retirement. According to a recent report from HR consulting firm AonHewitt, leakage due to plan loans, hardship withdrawals, and early distributions are a pothole on the road to retirement. Each year, employers contribute about $118 billion and workers contribute about $175 billion to retirement savings, but about $70 billion is withdrawn for nonretirement purposes. Over 25 percent of defined contribution plan participants use retirement savings for nonretirement purposes.

The simple message: Keep your hands out of the cookie jar! Leave your money in the plan for retirement; don’t take out a hardship withdrawal or loan, and if you terminate employment before retirement, keep your savings invested until you eventually retire.

To have a shot at a comfortable, traditional, non-working retirement, most employees without pensions would need to wait until age 70 to start Social Security and accumulate at least $500,000 in their 401(k) savings. The amounts reported by Fidelity show good progress toward these goals.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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