Chart of the day, retirement account edition

By Felix Salmon
September 14, 2011

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Many thanks to the good people in the Thomson Reuters HR department for helping put the data for this chart together; it’s my contribution to the TR Financial Wellbeing Month.

The blue bars on the chart show the average balance, quarter by quarter, in TR’s 401(k) accounts — more than 20,000 of them, at last count. The latest figures show an average balance of $94,581, an all-time high and an increase of $19,157 from a year earlier. That’s a rise of more than 25% in one year.

Americans tend to be much more obsessed with the stock market than the citizens of any other country; when it’s rising they’re happy, and when it’s falling they’re sad. One reason for that is that they tend to pay attention to retirement-account balances, and a falling stock market makes them feel that they’ve just lost lots of money.

For instance, from the third quarter of 2007 to the fourth quarter of 2008, the average 401(k) account dropped by $18,281, or 26%. That’s a lot of money: Thomson Reuters pays well, but we all could use an extra $18,281. And when you keep on paying money into your account, only to see it decline for five successive quarters, you can definitely get the feeling that you’re throwing you money away, and that you’d be better off not bothering. Wouldn’t you be better off not paying anything into your account, and instead spending $18,281 on, say, a new car?

Actually, you wouldn’t. The y-axes on this chart both go all the way to zero, which means that the decline in 401(k) balances really was a lot smaller than the decline in the broad stock market. And our retirement balances have been doing pretty well since the bottom of the market, too — better, actually, than the S&P 500.

What’s more, everybody wants to be invested in stocks when the market’s going up — just not when it’s going down. Is it possible to actively manage your 401(k) so that you try to go long stocks when they’re going up and then move to cash or bonds when stocks are falling? Well, you can try. But that’s called timing the market, and it tends to end in tears. You are not a hedge-fund manager, and even they get these things wrong. Don’t think you can time the market, because you can’t. So if you want to be invested in up markets, you have to be invested in down markets, too. And as the chart shows, your retirement account will tend to grow most of the time anyway.

The main reason for this is that we’re not just sitting back and hoping that the stock market will do all the heavy lifting. Every paycheck, we’re putting money into our 401(k) accounts — about 8.7% of what we earn, on average. And so every quarter, we see our balance rise not just because we’re great at investing, but also because we’re manually adding to the pot.

And in fact that second aspect of saving for retirement is significantly more important — and much more under our own control — than the first aspect. When it comes to our 401(k) plans, people tend to focus far too much on the quarter-to-quarter fluctuations in mark-to-market asset value, rather than trying simply to save as much money as they can for when they’re older. My advice is to think of a retirement account like a piggy bank: you put money in there on a regular basis, and eventually it grows to a substantial sum. Once it’s in there, of course, you try to invest in something reasonably sensible — target-date funds are a pretty good idea, so long as their fees are low. But you don’t have much control over the internal returns on your retirement funds; you do have control over how much you save. So concentrate on the latter more than the former.

And in fact the lower the stock market, the better for someone who won’t be retiring for another few years. I, for instance, won’t be retiring for another couple of decades — and so what I want is for stocks to remain as cheap as possible for as long as possible, so that I can buy as many of them as possible with the money I save. When stocks rise, that just makes them more expensive.

So when you get your 401(k) statement, just file it away in a drawer, unopened. Knowing your balance won’t do you any good, unless perhaps it scares you into saving more. If you’re already saving as much as you can, or if you’re maxing out your 401(k) contributions anyway, then it’s a good idea to just ignore both the stock market and your retirement balance. Neither of them is nearly as important to you as you think, especially since there’s nothing much you can or should be doing in response to either piece of information.

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