The endless stream of reports warning that Americans are screwed when it comes to having enough money saved for retirement is numbing.
But take a deep breath. This is mostly a bullish column.
Two new and surprising studies — one from Vanguard and the other from Transamerica Center for Retirement Studies — share a view that for many Americans, the future may not be so bleak as some of the pundits tell us.
Here are some of the key findings:
Retirement savings soar
Despite high inflation, Vanguard found that Americans set aside funds for retirement at the highest rates ever. More than 4 in 10 workers increased the amount of their paycheck they set aside in their 401(k) account last year, according to Vanguard’s “How America Saves 2024” report.
The study “revealed plenty of reasons for optimism that these plans are working as intended and driving stronger savings and investing behaviors for workers,” David Stinnett, head of strategic retirement consulting at Vanguard, told Yahoo Finance.
The analysis was pulled from Vanguard’s roughly 1,500 qualified plans and nearly 5 million retirement plan participants, for which Vanguard directly provides record-keeping services.
A little help goes a long way
Take a bow, automatic enrollment. The majority of plans — 6 in 10 — automatically enroll employees into the retirement plan, giving them the option to opt out rather than having to opt in. Ten years ago, only a third of plans did so.
That “overcomes many of the behavioral challenges that keep employees from enrolling in their 401(k) plan and getting started with investing for retirement,” Stinnett said.
Meanwhile, the deferral rate, or percentage of your paycheck that is automatically deferred to your 401(k), has increased. Last year, most employer-provided plans started workers at 4% or higher, nearly double the number who earmarked that amount a decade ago, per the report.
Together, these automatic savings features pack a punch. The average total savings rate, which includes employee deferrals and employer match, is 11.7%, according to Vanguard data. That’s the highest percentage the firm has recorded in the more than two decades that it has been parsing retirement saving behavior.
“We recommend saving 12%-15% of your income for retirement,” Stinnett said. “This year’s total average savings rate puts workers very close to the ideal range.”
Combine that with the rebounding stock market last year and in 2023, account balance averages at Vanguard increased by 19%. The average participant account balance was $134,128 as of year-end 2023, and the median balance was $35,286, a 29% increase since year-end 2022.
The impact of auto-enrollment is “most apparent when looking at younger workers,” Stinnett said. “Millennial and Gen Z workers have benefited from being automatically enrolled into their workplace retirement plans early in their careers.”
While I am delighted to see people ramping up their retirement savings, it’s good to remember that this is just a slice of American workers. Nearly half of US private-sector workers — roughly 57 million people — don’t have access to an employer-sponsored pension, such as a 401(k), and so saving for retirement is all voluntary.
Not all workers reap the reward
What you make is a big factor in your ability to save. Fifty-eight percent of eligible employees with income of $30,000 to $49,999 contributed to their employer’s plan in 2023, while 95% of employees with income of more than $150,000 elected to participate, according to the analysis.
Participation rates were lowest for employees younger than 25, with 58% of these workers contributing to their employer’s plan, while more than 8 in 10 employees between ages 35 and 64 made such deferrals. Time on the job also had a huge impact on plan participation. Seventy-three percent of eligible employees with less than two years on the job participated in their employer’s plan, while nearly 9 in 10 workers with four or more years on the payroll were participants.
Target funds are the bee’s knees
How’s this for an eye-catching leap? Eighty-three percent of all participants used target-date funds, and 70% of target-date investors had their entire account invested in a single target-date fund, that’s up from 6 in 10 in 2022, and more than double those who did so in 2013.
Target-date strategies are a “set-it-and-forget-it” way to invest savings based on the date of retirement, say, 2035 or 2045. At that point, the fund will shift an account’s investments from stocks to more fixed-income and less volatile choices, such as cash and bonds, as you age.
Participants who are pure target-date fund investors not only benefit from continuous rebalancing but are also far less likely to trade when compared with all other investors.
“Before target-date funds and managed account advice became common, it was frequent for young workers to have equity allocations well below recommended levels, potentially missing out on growth,” Stinnett said. “It was also more common to have extreme equity portfolios, defined as a portfolio with no equity exposure or 100% equity. Now, only 3% of participants hold those extreme portfolios thanks in large part to the rise of target-date investing and managed account advice.”
Hardship withdrawals may be bite-size but at record high
Sure the lion’s share of Vanguard plan participants are loading up their account balances, but there are also more taking money out through hardship withdrawals.
The share of Vanguard 401(k) holders who ransacked their accounts for financial emergencies in 2023 was the largest ever. Last year, nearly 4% pulled money out early to pay for financial hardships, and the percentage of workers dipping into their savings for loans increased by 12% compared with 2022. Nearly half of these withdrawals were between $1,000 and $4,999, mostly to pay medical expenses and to avoid a home foreclosure or eviction, both fallouts from relentless inflation and rising costs.
Even so, taking money from your retirement income has a bite beyond depleting your accounts. You must pay income tax on any previously untaxed money you receive. You may also have to pay an additional 10% tax if you’re not at least 59½, unless you meet one of the IRS exceptions. These include certain medical expenses, qualified tuition payments, and up to $10,000 for first-time homebuyers.
Super savers are no longer the outliers
“Super savers” are workers who participate in a 401(k) or similar retirement plan and contribute more than 10% of their salaries into the plan.
Per new research from the Transamerica Center for Retirement Studies, 44% of workers participating in a 401(k) or similar retirement plan are super savers — 15% contributing 11% to 15%, and 29% contributing more than 15% of their annual pay. And these so-called super savers are found across generations: a whopping 53% of Generation Z, 44% of millennials, 40% of Generation X, and 44% of baby boomers.
“The increase is impressive,” said Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies. Looking back on Transamerica Center for Retirement Studies’ 2019 survey report, only 36% of 401(k) or similar plan participants were super savers, including 38% of millennials, 32% of Generation X, and 39% of baby boomers.
Back then, Gen Z was just tip-toeing into the workplace, so it was tough to tell how they were socking money away for retirement, but today, 71% of Generation Z workers are saving in an employer-sponsored retirement plan — and they started at age 20, according to the data. That’s compared to millennials who started retirement accounts at age 25; Generation X at age 30, and baby boomers at age 35.
We all agree that being a super saver is a key ingredient for a comfortable retirement, but it’s not all you need to do. Collinson adds: “It’s also critical to safeguard your health and keep your job skills up to date which, in turn, can help you work longer, save more, and grow your savings.”
