What does your 401(k) look like? Americans are saving more, but more may need to be done, a new report shows.
Vanguard releases annual report, How America Can Save in 2024. Vanguard and Fidelity are the two largest sponsors of 401(k) plans, a snapshot of how nearly 5 million participants use their money.
The good news: Stock market returns are up, and thanks in large part to automatic enrollment plans, investors are saving more than in the past.
The bad news: The median 401(k) account balance among those approaching retirement (age 65 and older) remains low.
The bottom line: Americans still rely heavily on Social Security for much of their retirement years.
Higher return rates, participation rates, and savings rates
Why do we care so much about 401(k) plans? Because it is the primary private savings vehicle for Americans in retirement. These “defined contribution” plans cover more than 100 million Americans with more than $10 trillion in assets.
First, 2023 is going to be a good year for investors. Participants’ average total return was 18.1%, the best year since 2019.
But to be effective retirement vehicles, these plans need to: 1) have high participation rates and 2) have high levels of savings.
On these fronts, there is good news. John James, managing director of Vanguard’s Institutional Investors Group, called it a “progressive year.”
Program participation is at an all-time high. Due to changes in the law a few years ago, 59% of plans offer the opportunity to automatically enroll in a 401(k) plan, a record high. This is a major improvement: Previously, 401(k) plan enrollment often fell short of expectations because investors had to “opt in,” meaning they had to choose to participate in the plan. Many people fail to do so due to indecision or simple ignorance. By switching to automatic registration, participants are automatically registered and must “opt out” if they do not wish to participate.
The result: Enrollment is up. The participation rate for the automatic enrollment program was 94%, while the participation rate for the voluntary enrollment program was 67%.
Participants’ savings rates are at an all-time high. Participants delayed saving by an average of 7.4%. Including employee and employer contributions, participants’ average total contribution rate was 11.7%.
Some other observations about Vanguard 401(k) plan investors:
They prefer stocks and target-date funds. They prefer stocks to bonds or any other investment. The average contribution rate for stock plans is 74%. A record 64% of all donations in 2023 went to target-date funds, which automatically adjust stock and bond allocations as participants age.
They don’t trade much. By 2023, only 5% of non-advisor participants will be trading within their accounts; 95% will not be trading at all. “Over the past 15 years, we have generally observed a decline in participant trading volume,” Vanguard said, attributing this in part to increased adoption of target-date funds.
Account balances remain low despite rising markets
In 2023, the average Vanguard participant’s account balance was $134,128, but the median balance (half more, half less) was only $35,286.
Why are the mean and median so different? Because a small group of investors with large balances drives up the average. Forty percent of participants have less than $20,000 in their retirement accounts.
Account Balance Allocation
- 40% below $20,000
- $20,000-$99,999 30%
- $100,000-$249,900 15%
- $250,000 + 15%
Source: Vanguard Group
Median balances remain low for those approaching retirement
Another way to look at this is to ask people of retirement age how much they have saved, as this indicates how prepared they are for their upcoming retirement.
The average account balance for investors age 65 or older is $272,588, but the median balance is only $88,488.
The average balance of $88,488 is not that much considering older participants have higher incomes and higher savings rates. That’s not a lot of money for a 65-year-old who’s about to retire.
Of course, these balances don’t necessarily reflect total lifetime savings. Some people have more than one retirement plan because they have other plans with their former employers. Most people do have other sources of retirement savings, usually Social Security. The number of pensioners may also be declining. Some people may have money in a checking account or own stocks or bonds outside of a retirement account.
The math doesn’t look good anyway
Let’s do some retirement calculations.
Typical annual withdrawals from a 401(k) account in retirement are about 4%. Withdraw 4% of $88,488 annually to get $3,539 every 12 months.
Next is Social Security. As of January 2023, The average Social Security benefit is nearly $1,689 Monthly, or approximately $20,268 per year.
Finally, although pensions are a disappearing benefit, we include them.
According to the Pensions Rights Centre, Median annual pension benefits for private pensions It’s $9,262 (government employees have higher benefits).
Here is our annual retirement budget:
- Personal savings $3,539
- Pension $9,262
- Social Security$20,264
- Total: $33,065
It’s certainly possible to live on $33,000 a year, but that’s probably only feasible if you own your own home, have low expenses, and live in a low-cost part of the country.
Even so, it’s hardly a solid retirement.
These are the lucky ones. Only 57% of retirees have tax-deferred retirement accounts Such as a 401(k) or IRA. Only 56% reported receiving income from superannuation.
This extra income can go a long way toward determining whether retirees feel better or worse about retirement.
In 2023, four out of five retirees said their financial situation was at least good, but that varied widely depending on whether the retiree had an income source other than Social Security. Only 52% of retirees with no private income said their financial situation was at least good.
What can be done?
To have a more fulfilling retirement, Americans must save more.
One problem is that investors still don’t contribute the maximum amount allowed. Only 14% of participants save the legal maximum of $22,500 per year ($30,000 for those aged 50 or older). The likely reason: Most people feel they can’t afford it.
However, even with incomes over $150,000, only 53% paid the maximum allowed. Given that employee matching is “free money,” one would think that participants in this income bracket would rationally choose to maximize their contributions. The fact that many still don’t suggests the need for more investor education.
Regardless, it’s dangerous to think that a rising stock market will bail out retirees. Heading into 2022, with the S&P 500 down 20%, investor confidence in its financial future is likely to deteriorate.
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