What does your 401(k) look like? A new report shows Americans are saving more, but probably still need to do more.
Vanguard has released its annual report, “How America Saves 2024.” Vanguard and Fidelity are the two largest sponsors of 401(k) plans, and this is a snapshot of what nearly five million participants do with their money.
The good news: Stock market returns have increased and investors are saving more than in the past, largely thanks to automatic enrollment plans.
The bad news: The average 401(k) account balance for a person nearing retirement (65+) remains very low.
The bottom line: Americans still rely heavily on Social Security for a large portion of their retirement.
Higher returns, participation rates, savings rates
Why are 401(k) plans so important to us? Because it is Americans’ most important private savings instrument for retirement. More than 100 million Americans are covered by these defined contribution plans, with more than $10 trillion in assets.
First, 2023 was a good year for investors. The average overall response rate from participants was 18.1%, the best year since 2019.
But to be effective tools for retirement, these plans must: 1) have a high participation rate and 2) have high savings.
There is good news on these fronts. John James, managing director of Vanguard’s Institutional Investor Group, called it “a year of progress.”
Plan participation reached an all-time high. Thanks to a change in the law a few years ago, a record 59% of plans offered automatic enrollment in 401(k) plans. This is a major improvement: Previously, enrollment in 401(k) plans often fell short of expectations because investors had to “opt in,” meaning they had to choose to participate in the plan. Many people didn’t do it out of indecision or simple ignorance. By switching to automatic registration, participants were automatically registered and had to “opt out” if they did not want to participate.
The result: Enrollment rates have increased. Automatic enrollment plans had a 94% participation rate, compared to 67% for voluntary enrollment plans.
Participants’ savings rates reached all-time highs. The average participant has set aside 7.4% of their savings. Including employee and employer contributions, the average total contribution rate of participants was 11.7%.
A few more observations about Vanguard’s 401(k) plan investors:
They prefer stocks and target-date funds. They prefer stocks over bonds or other investments. The average plan contribution to shares is 74%. A record 64% of all contributions in 2023 went into target-date funds, which automatically adjust stock and bond allocations as the participant ages.
They don’t trade much. In 2023, only 5% of non-advised participants traded through their accounts; 95% did not trade at all. “Over the last 15 years, we have generally seen a decline in participant trading,” Vanguard said, partly due to the increasing adoption of target funds.
Despite market gains, account balances are still low
In 2023, the average account balance of Vanguard participants was $134,128, but the median account balance (half had more, half had less) was only $35,286.
Why such a big difference between the average and the median? Because a small group of investors with large balances drive up the average values. Forty percent of participants had less than $20,000 in their retirement accounts.
Distribution of account balances
- Less than $20,000 40%
- $20,000 to $99,999 30%
- $100,000 to $249,900 15%
- $250,000 + 15%
Source: Vanguard
The average balances of those nearing retirement are still low
Another way to look at the problem is to ask how much people have saved in retirement, because that is an indication of how prepared they are for the upcoming retirement.
Investors age 65 or older had an average account balance of $272,588 but an average balance of just $88,488.
A median balance of $88,488 isn’t much considering older participants have higher incomes and higher savings rates. That’s not a lot of money for a 65-year-old who is nearing retirement.
Of course, these balances don’t necessarily reflect total lifetime savings. Some people have more than one retirement plan because they had different plans with previous employers. Most have other sources of retirement savings, typically Social Security. A shrinking number can also have a pension. Some may have money in checking accounts or stocks or bonds outside of a retirement account.
Regardless, the math doesn’t look good
So let’s do some retirement math.
A typical annual draw on a 401(k) account in retirement is about 4%. If you subtract 4% of $88,488 per year, you get $3,539 every 12 months.
Next, Social Security. As of January 2023, the average Social Security benefit was nearly $1,689 per month, or about $20,268 per year.
Even if pensions are a vanishing advantage, we should still include them.
According to the Pension Rights Center, the average annual pension benefit for a private pension is $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 would probably only work if you own a home, have low expenses, and live in a low-cost part of the country.
Even then, it would hardly be a robust retirement.
And those are the lucky ones. Only 57% of retirees have a tax-advantaged retirement account such as a 401(k) or IRA. Only 56% reported receiving income from a pension.
And this additional income largely determines whether a pensioner feels good or bad in retirement.
In 2023, four out of five retirees said they were at least doing well financially, but this varied greatly depending on whether the retirees had sources of income outside of Social Security. Only 52% of pensioners without their own income said that they were at least doing well financially.
What can be done?
To have a more stable retirement, Americans simply need to save more.
One problem is that investors are still not depositing the maximum allowed amount. Only 14% of participants saved the legal maximum of $22,500 per year ($30,000 for those ages 50 and older). The likely reason: Most felt they couldn’t afford it.
However, even for those with incomes over $150,000, only 53% paid the maximum allowable amount. Given that employee ownership is “free money,” one might assume that participants in this income bracket would rationally choose to maximize their contribution. The fact that many still do not believe that more investor education is needed.
Regardless, it is very dangerous to assume that retirees will be saved by an ever-rising stock market. Another year approaching 2022 in which the S&P 500 is down 20% and investors’ confidence in their financial future is likely to wane.
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2024-06-26 11:00:06
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