In a recent analysis by Fidelity, it was revealed that the average 401(k) plan savings rate has hit a record high of 14.2% during the first quarter of 2024. This rate, which includes both employee and company contributions, is inching closer to the recommended benchmark of 15%. Fidelity estimates that a total retirement savings rate of at least 15% is essential in order to maintain one’s current lifestyle in retirement. The increase in savings rate can be attributed to employees deferring an average of 9.4% of their income, while companies have contributed an average of 4.8%, including matches, profit sharing, and other deposits.
According to Mike Shamrell, the vice president of thought leadership for Fidelity’s workplace investing, the 15% benchmark is merely a goalpost and the right retirement savings rate varies depending on various factors such as age, expected retirement date, projected Social Security income, and other retirement plans. It is important to assess your individual situation and if reaching 15% seems challenging, at least contribute enough to get your full company match.
Certified financial planner Andrew Herzog suggests target savings rates of 10% to 30% based on household requirements. Factors such as age and financial stability play a crucial role in determining the ideal savings rate. While a younger individual may struggle to save 10%, an older couple may need to stretch their savings rate to 20% to achieve their retirement goals.
Many companies now automatically enroll eligible employees in 401(k) plans, with a default contribution rate of 4.1%. However, nearly 40% of auto-enrolled plans started employee deferrals at 5% or higher, showcasing a positive shift towards higher savings rates. Automatic contribution increases have also contributed to boosting savings rates, with over 33% of plan participants increasing their 401(k) contributions at the end of 2023, with three-quarters of these increases being automatic adjustments. Additionally, around 78% of 401(k) plans that auto-enrolled employees also had auto-escalation in 2022, leading to an overall positive trend in savings rates.
The importance of retirement savings rates cannot be overstated. It is crucial for individuals to assess their financial situation, set realistic savings goals, and take advantage of company matches and automatic contribution increases to secure a comfortable retirement. By understanding the significance of savings rates and making informed decisions about retirement planning, individuals can ensure financial security in their golden years.
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