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Howard Gold’s No-Nonsense Investing: COVID-19 has prompted a boom in retirement savings

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COVID-19 has had devastating effects on people’s health, lives and livelihoods. But for millions, it has been a boon for their retirement savings, an area in which many Americans have lagged for years.

According to Fidelity Investments, the average balance in IRA accounts at the firm rose from $115,400 in the fourth quarter of 2019 to $128,100 in the fourth quarter of 2020, an increase of 11%. With dividends reinvested, the S&P 500
SPX,
+0.31%

gained nearly 18% during that time, but remember, most IRAs are invested in a mixture of stocks, bonds and cash and few are 100% in equities.

Read: Check out MarketWatch’s new retirement calculator

Last year, the number of Fidelity IRA accounts that received a contribution increased by 35% and the average contribution per account rose by 5%. That doesn’t sound like much, but it suggests that many people who kept their jobs (about eight million jobs lost last year still haven’t returned) decided to step up their retirement savings during the pandemic, along with buying Pelotons
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-5.23%

and subscribing to Netflix
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-0.42%
,
HBO Max
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+1.17%

and Disney+
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+0.05%
.

Read: How the pandemic has changed the retirement landscape

Furthermore, Fidelity reported, the number of new, traditional, Roth and Roth for Minor IRA accounts increased by 56% from 2019 to 2020. That’s in line with data from Charles Schwab
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+2.27%
,
which reported a 50% increase in IRA openings during the first two months of 2021 over the first two months of 2020, a slightly different time period.

I wanted to dig deeper into this, but no one from Fidelity or Schwab was available to talk to me. Vanguard and T. Rowe Price
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-0.38%

declined to be interviewed or share data and the Investment Company Institute, the trade organization and lobbying group of the fund industry, referred me to the firms for further comment.

Read: Teach your kids the magic of compounding so they can retire rich

But in February, Fidelity issued a full quarterly report on retirement investors that contains a wealth of data. I can’t say for sure how representative Fidelity customers are of U.S. retirement investors in general, but the firm has 30 million retail clients, and their behavior tells us something.

The most important may be that they are saving—a record 9% savings rate in workplace retirement accounts in last year’s fourth quarter. One out of every three individuals increased his or her contributions to 401(k) plans at some point in 2020, in addition to increases in IRA contributions. That was true for boomers, Generation X and millennials. The average combined employee and employer contribution to Fidelity-managed corporate defined contribution plans was more than $11,000 last year, which I think is pretty darn good.

Generation Z, those born between 1997 and 2012, whose oldest members have just entered the workforce, have started off strongly, with 800,000 workplace accounts and 114,000 IRAs. And while we’re on the subject of young people, some 69% of millennials in Fidelity-run employer retirement plans are 100% invested in target-date retirement funds. That’s pretty boring stuff compared with cryptomania or “sticking it to The Man” by buying GameStop
GME,
-2.63%

shares, but I’m confident it will pay off big in the long run for young investors: the average retirement account balance at Fidelity rose 80% in the decade from Dec. 31, 2010 through the end of 2020.

Read: If you’re in your 50s or 60s consider these moves to avoid higher taxes n retirement

Younger investors also are snapping up Roth IRAs, which are funded with after-tax money and whose withdrawals are tax-free; they comprised 58.7% of all Fidelity IRA contributions in 2020. If you can afford it, combining a workplace retirement plan that features automatic pretax payroll deductions with a Roth IRA, or Roth 401(k), is the optimal saving and investing strategy for retirement. That’s because traditional 401(k) plans usually have a nice employer match, which is free money, and Roth IRAs let you invest for the very long run, not worry about paying taxes on withdrawn assets, and give you a simple, tax-exempt way of passing on your assets to future heirs.

And though the CARES Act waived the 10% penalty for early withdrawals up to $100,000 from retirement plans in 2020, only about 3% of Fidelity participants took a CARES Act withdrawal, and the average distribution was $7,600.

So, millions of Fidelity investors of all ages increased their savings rates; stepped up their contributions to company retirement plans and Roth IRAs; saw their account balances hit new highs; mostly avoided hardship withdrawals, and maintained diversified portfolios based on automatic investing to target funds.

There’s obviously no such thing as a “good” pandemic, because of its heavy human and economic cost, but COVID-19 has left millions of Americans in better financial shape for retirement than they were beforehand.

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