Retirement savings plunge 23% from a year ago due to stock market volatility

Market volatility continues to take a toll on retirement savers in the US, with the typical 401(k) down 23 percent from a year ago, according to new industry data.

Fidelity Investments reported on Thursday that its average 401(k) balance stood at $97,200 at the end of the third quarter, down from $103,800 in June and $126,100 one year ago. 

IRA savings accounts followed a similar trend, with the average IRA balance down 25 percent from a year ago, at $101,900, at the end of September, following three straight quarters of declines.

The decline in savings levels reflected the broader slump in stock markets this year year, amid soaring inflation, rapidly rising interest rates, and fears that the economy could soon crash into a sharp downturn with massive layoffs.

In the first nine months of 2022, Wall Street suffered three quarterly declines in a row, the longest losing streak for the S&P 500 and the Nasdaq since 2008, and the Dow's longest string of quarterly slumps in seven years. 

Market volatility continues to take a toll on retirement savers in the US, with the average Fidelity 401(k) down 23% from a year ago

The S&P 500, a key component in many retirement accounts, is down 16 percent from a year ago amid soaring inflation and rapidly rising interest rates

Still, Fidelity says that market volatility has not deterred retirement savers from adding to their nest eggs, noting that the total 401(k) savings rates held strong.

The savings rate, reflecting both worker and employer 401(k) contributions, remained fairly steady at 13.8 percent, compared to 14 percent in the first quarter and not far below Fidelity's suggested savings rate of 15 percent. 

The investment giant also said that the number of IRAs on its platform continued to increase, and the percentage of employees taking out emergency loans from their 401(k) accounts remained low for the sixth consecutive quarter. 

'Retirement savers have wisely chosen to avoid the drama and continue making smart choices for the long-term,' said Kevin Barry, president of Workplace Investing at Fidelity.

'This is important, because one of the most essential aspects of a sound retirement savings strategy is contributing enough consistently – in up markets, down markets, and sideways markets -- to help reach your goals,' he added.

Barry noted that October, which is not included in last quarter's data, was the best month for stocks since 1976, with the Dow Jones Industrial Average surging 13.95 percent.

Fidelity says that market volatility has not deterred retirement savers from adding to their nest eggs, noting that the total 401(k) savings rates held strong

For anyone who is at least a few years away from retirement, financial experts say that staying the course and making regular investments through retirement accounts is the best way to build a nest egg, even in periods of wild volatility.

Once cash is deposited in a retirement account, which reaps tax benefits, retirement savers are able to decide how they want to invest the money, whether it be in stocks, bonds, or a huge variety of funds with different compositions and goals.

Fidelity says that only 4.5 percent of 401(k) and 403(b) savers made a change to their asset allocation in the third quarter, down from 5 percent a year ago.

Of those who changed their allocation, the top change involved shifting savings to more conservative investments.  

Fidelity also noted that the youngest members of the workforce, Gen Z, actually saw their 401(k) balances rise last quarter, with the average balance rising 1.2 percent.  

Fidelity says that only 4.5 percent of 401(k) and 403(b) savers made a change to their asset allocation in the third quarter, down from 5 percent a year ago (stock image)

Gen Z savers are heavily invested in target date funds, which are designed to shift from higher risk/higher return to lower risk/lower return over time as a target retirement date approaches.

As of September, 85 percent of Gen Z savers have all of their 401(k) savings in a target date fund, according to Fidelity.

For retirement savers worried about market volatility, Fidelity says there are a number of reasons to stay the course and keep adding to savings regularly.

These include tax benefits, the advantage of matching employer benefits, and the ability to dollar-cost average.