The average 401(k) savings rate, which includes both employee deferrals and company contributions, has reached historic levels in recent years. In 2023, the average combined savings rate was reported to be around 11.7%, matching the record high from the previous year. Another report from Fidelity also indicated record savings, with a combined rate of 14.2% in the first quarter of 2024. These figures are based on data collected from thousands of qualified plans and millions of participants.
Experts from Vanguard recommend saving between 12% to 15% of your annual earnings, including employer contributions, for retirement every year. Fidelity sets a benchmark of 15% for retirement savings. It is suggested that individuals try to increase their savings rate by at least 1% each year and aim to reach the combined benchmark of 12% to 15% to secure a financially stable retirement.
According to the Vanguard analysis, nearly 25% of participants deferred more than 10% of their earnings in 2023. Additionally, 43% of employees increased their savings rate that year. In 2023, an estimated 14% of participants hit the 401(k) deferral limit, which was $22,500 for savers under age 50. The average employee deferral rate returned to a record high of 7.4% in 2023 after a slight drop the year before, as per the Vanguard report.
401(k) plan features such as automatic enrollment and higher default savings rates have played a significant role in increasing employee deferrals over time. Plans that have automatic increases or step functions where individuals automatically save 1% more every year have been proven to be effective in boosting savings rates. Around 60% of 401(k) plans had a default savings rate of 4% or higher in 2023, compared to only 35% with that rate a decade ago.
While financial service companies have established retirement savings benchmarks, the recommended percentage can vary based on individual needs and circumstances. Factors such as age, proximity to retirement, income level, lifestyle expectations, and current debt should all be considered when deciding on the right savings rate. Certified financial planner Alyson Basso advises a target savings rate of 15%, combining both employee and employer contributions, but acknowledges that this target can vary depending on individual situations.
It is essential for individuals to tailor their savings strategy to their specific needs, goals, and circumstances. Older clients may need to save more aggressively if they have not yet reached their retirement savings goals, while younger clients can gradually increase their deferrals as their income grows. Gen Z has shown a willingness to invest early, while Gen X may struggle to catch up with their retirement savings. Each client’s situation is unique, and their savings plan should be customized to suit their individual financial objectives.