Retirement savings make progress, with caveats

On some aspects of retirement savings Americans are making gains, but on others they're backsliding, according to recent report by Fidelity Investments.

On the plus side, Fidelity found that average IRA account balances increased to $96,300 -- an all-time high -- at the end of 2015's second quarter. Average 401(k) balances for the same period were $91,100, very close to the record of $91,800. Average annual total contributions to 401(k) accounts, including employer matches, were $10,180, another high.

The worrisome news? The average 401(k) loan balance also hit an all-time high, at $9,720. According to the Fidelity report, just over 10 percent of 401(k) participants initiated a loan in the past 12 months, and nearly 22 percent had a loan outstanding. Loan repayments can compete for savings because if a worker doesn't have a loan, she could save the amount of the loan payment for retirement instead.

But 401(k) loans have another serious problem. If you terminate employment before repaying the loan, most 401(k) plans require you to pay the balance in full upon termination. If you don't, the unpaid balance is considered a distribution, and it's subject to income taxes and early payment penalties if you're under age 59-1/2.

The bottom line: Take a 401(k) loan only if you're truly desperate for cash and have no other means. Don't take one out for a discretionary purchase, such as to buy a boat or vacation home.

The Fidelity report also raised concerns that boomers approaching retirement may be top-heavy on stocks due to the long run-up in equities. According to Fidelity's Freedom Fund Equity Glide Path, the target allocation to stocks for people currently age 55 to 59 who plan to retire at age 67 should be 70 percent. Yet more than one-fourth of Fidelity investors in this age group had an asset allocation 10 points higher than this target. Ten percent had 100 percent of their assets invested in stocks.

If you're within 10 years of retirement and have significant amounts of retirement savings, you should learn about the various methods you can use to generate a retirement paycheck from your savings. An important part of this decision is the appropriate asset allocation you should use as you approach your retirement date.

With the wrong allocation, another meltdown similar to the one in 2008 could derail or delay your retirement. Most target date funds have allocations to stocks well above 50 percent for people in their 50s and 60s, so another stock market meltdown could result in significant account losses.

You can use various strategies to protect your retirement income in the period leading up to retirement, including constructing bond ladders; investing target amounts in bonds, TIPs and Treasury bills; buying fixed deferred annuities; and buying guaranteed lifetime withdrawal benefit products.

These methods all have their pros and cons, so you'll do best to plan ahead now and learn the strategies that might fit your goals and circumstances. If you wait until the next stock market crash to react, it could be too late.

Taken together, however, the Fidelity report is encouraging. Given the worries we hear everywhere about a "retirement crisis," we'll need all the savings we can muster.

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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 Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.