The release of Vanguard’s annual report, How America Saves 2024, sheds light on the current state of Americans’ retirement savings. While the report shows that investors are saving more than in the past, there is still a need for increased savings to ensure a comfortable retirement. With the median 401(k) balance of those nearing retirement remaining low, it is evident that Americans are still heavily reliant on Social Security as a significant portion of their retirement income.
401(k) plans are a vital component of Americans’ retirement savings, with over 100 million individuals covered by these “defined contribution” plans. As the main private savings vehicle for retirement, 401(k) plans hold over $10 trillion in assets. However, for these plans to effectively support retirement goals, they must have high participation rates and substantial savings levels.
The report highlights positive trends in retirement savings, such as the record-high participation rates in 401(k) plans and the increase in automatic enrollment. With 59% of plans now offering automatic enrollment, more investors are contributing to their retirement accounts. Additionally, participant saving rates have reached all-time highs, with the average total contribution rate being 11.7%.
Vanguard’s report also provides insights into investor behavior and preferences within 401(k) plans. It shows that participants prefer equities and target-date funds, with 74% of contributions allocated to equities and 64% of contributions going into target-date funds. Moreover, the report indicates that participants tend to trade infrequently, with only 5% of nonadvised participants making trades in 2023.
One concerning finding from the report is the significant gap between the average and median 401(k) balances. While the average account balance for Vanguard participants was $134,128, the median balance was only $35,286. This gap is attributed to a small group of investors with large balances pulling up the averages, while 40% of participants had less than $20,000 in their retirement accounts.
The report also highlights the challenges faced by older investors nearing retirement age. While investors aged 65 or older had an average account balance of $272,588, the median balance was only $88,488. This disparity is significant considering that older participants typically have higher incomes and savings rates, raising concerns about their preparedness for retirement.
To assess the adequacy of retirement savings, the report suggests looking at the annual drawdown from a 401(k) account, Social Security benefits, and potential pension income. For instance, drawing down 4% of a $88,488 balance yields $3,539 annually. When combined with Social Security benefits and potential pension income, the total retirement budget may fall short of providing a comfortable standard of living in retirement.
While there are positive trends in retirement savings, such as increased participation rates and saving levels, there are still significant challenges that Americans face in achieving a secure retirement. With disparities in account balances and concerns about the adequacy of retirement budgets, there is a need for increased awareness and action to address these issues. Saving for retirement is a critical aspect of financial planning, and Vanguard’s report serves as a reminder of the importance of early and consistent saving habits to ensure a comfortable retirement.