The newly released report from Vanguard, How America Saves 2024, sheds light on the state of Americans’ 401(k) saving habits. While there is some positive news to report, there are also areas of concern that highlight the need for increased financial planning and saving efforts among Americans.
Increased Savings, yet Room for Improvement
One of the positive takeaways from the report is that Americans are saving more for retirement compared to previous years. This increase in savings can be attributed to factors such as the rise in stock market returns and the implementation of automatic enrollment plans by many employers.
However, despite the overall increase in savings rates, the median 401(k) account balance for individuals nearing retirement age (65+) remains significantly low. This indicates that while Americans are making progress in saving for retirement, there is still a heavy reliance on Social Security benefits as a crucial source of income during retirement.
Importance of 401(k) Plans
401(k) plans play a vital role in American retirement savings, with over 100 million individuals covered by these defined contribution plans, totaling more than $10 trillion in assets. This highlights the significance of these plans as the primary source of private savings for retirement for many Americans.
In 2023, investors experienced a good year, with the average total return rate for participants reaching 18.1%, the highest rate since 2019. However, for 401(k) plans to be effective in helping individuals save for retirement, they need to have high participation rates and hold substantial levels of savings.
The report indicated positive progress on these fronts, with plan participation rates reaching all-time highs. Automatic enrollment in 401(k) plans saw a record high of 59%, a significant improvement from previous years when enrollment rates fell short due to the opt-in nature of participation.
With the switch to automatic enrollment, participation rates have increased, with plans utilizing this feature boasting a 94% participation rate compared to 67% for voluntary enrollment plans. Participant saving rates also reached all-time highs, with the average participant contributing 7.4% of their savings and a total contribution rate of 11.7% when including employee and employer contributions.
Vanguard’s report also highlighted the investment preferences of its 401(k) plan investors, showing a strong preference for equities and target date funds. Equities accounted for 74% of average plan contributions, while a record high of 64% of contributions went into target-date funds in 2023.
Additionally, the report noted a decline in participant trading over the past 15 years, with only 5% of nonadvised participants engaging in trading activities in 2023. This trend was partially attributed to the increased adoption of target-date funds, which automatically adjust allocations based on the participant’s age.
Despite the average account balance for Vanguard participants being $134,128 in 2023, the median balance was significantly lower at $35,286. This gap between the average and median balances can be attributed to a small group of investors with larger balances pulling up the averages, while 40% of participants had less than $20,000 in their retirement accounts.
Further analysis of account balances for individuals aged 65 and older revealed an average balance of $272,588, with a median balance of $88,488. This stark difference highlights the financial challenges many older Americans may face when approaching retirement, as the median balance may not be sufficient to sustain them through their retirement years.
To put these figures into perspective, consider a typical 4% annual drawdown from a $88,488 401(k) account, resulting in an annual income of $3,539. When combined with the average Social Security benefit of $20,268 per year and a median annual pension benefit of $9,262, the total yearly retirement budget amounts to $33,065.
While there have been positive developments in Americans’ 401(k) saving habits, there is still a pressing need for increased financial literacy, planning, and savings efforts to ensure a secure retirement for all individuals. It is crucial for Americans to take proactive steps towards building their retirement nest egg and reducing their reliance on external sources of income during their later years.