Retirement Account Balances Rebound in 2023, Fueled by Positive Savings Behaviors and Market Growth

In a surprising turn of events, retirement savers have seen a remarkable improvement in their account balances, defying the expectations of most economists. Fidelity Investments, the largest provider of 401(k) savings plans in the nation, has reported that retirement account balances, which experienced a significant decline in 2022 due to market volatility, have now shown a strong recovery.

Substantial Increase in Balances

According to the latest data from Fidelity, the average 401(k) balance at the end of 2023 rose by a remarkable 14% from the previous year, reaching an impressive $118,600. Similarly, individual retirement account balances also witnessed a substantial increase, growing by 12% year over year to reach $116,600 in the fourth quarter of 2023.

Positive Savings Behaviors and Market Performance

Fidelity attributed these encouraging outcomes to the positive savings behaviors of retirement savers. The president of workplace investing at Fidelity Investments, Sharon Brovelli, expressed satisfaction with the high note on which the past year concluded for retirement savers. Additionally, Mike Shamrell, Fidelity's vice president of thought leadership, emphasized that a favorable year for the major indexes significantly contributed to the improved outcomes. The Nasdaq experienced an impressive 43% surge in 2023, while the S&P 500 recorded a 24% annual gain, and the Dow Jones Industrial Average rose by more than 13%.

Impact of Inflation and Stock Market on Retirement Accounts

The end of 2023 also brought positive news for the economy, with signs indicating a cooling of inflation. This development not only benefited the overall economy but also had a positive impact on stocks. Following a nine-week winning streak that closed out the year, the S&P 500 witnessed an increase in the number of Fidelity 401(k) plans with a balance of $1 million or more, rising by 20% from the third quarter of 2023. Moreover, the number of 401(k) millionaires increased by 11.5% year over year.

Behavior of Retirement Savers

According to Fidelity's findings, more than a third of retirement savers increased their contributions to retirement savings. The average 401(k) contribution rate, comprising both employer and employee contributions, currently stands at 13.9%, slightly below Fidelity's recommended savings rate of 15%. However, despite the positive trends in savings behaviors, there was a rise in the percentage of workers taking loans from their 401(k) accounts for various reasons, including hardships. This percentage increased to 8.9% from 7.8% at the end of 2022.

Financial Challenges and Borrowing Trends

While the positive financial trends for retirement savers are promising, broader financial challenges persist. Many households are increasingly relying on credit cards to meet their financial needs. A report by Bankrate revealed that more than one-third of adults across all age and income levels have more credit card debt than emergency savings, a concerning trend amid record high credit card rates.

Guidance on Financial Decisions

In light of these trends, Fidelity's Shamrell suggested that, in times of financial stress, borrowing from a retirement account might be a more viable option than relying on high-interest debt, given the current record-high credit card rates. However, he emphasized that such decisions should be made in the context of genuine financial need, cautioning against using retirement savings for non-essential expenses.

Unlike credit card debt, borrowing from a 401(k) allows individuals to repay themselves with interest, and the interest rates are generally much lower than those associated with credit cards, which currently stand at a record high of over 21%.