401(k) savings rates have reached historic levels as plan designs have evolved to make it easier for workers to save money for retirement. According to Vanguard’s yearly analysis, the average combined savings rate in 2023 was estimated to be 11.7%, matching the record high from the previous year. Similarly, a Fidelity report found a combined savings rate of 14.2% for the first quarter of 2024, based on a large sample of corporate plans and participants.
Vanguard recommends saving between 12% and 15% of your earnings each year, including employer contributions, for retirement. On the other hand, Fidelity’s benchmark for savings is at 15%. It is advised to increase your savings rate by at least 1% each year and aim to reach the 12% to 15% benchmark for optimal retirement savings.
The analysis found that nearly 25% of participants deferred more than 10% of their earnings in 2023, and 43% of employees increased their savings rate that year. Additionally, an estimated 14% of participants hit the 401(k) deferral limit in 2023, showing a consistent trend since 2020. The average employee deferral rate returned to a record high of 7.4% in 2023 after a slight drop the previous year, highlighting the importance of consistent savings habits.
Features like automatic enrollment and higher default savings rates have contributed to increased employee deferrals over time. Plans with automatic increase options where employees save 1% more every year have proven to be effective in boosting savings rates. In 2023, 60% of 401(k) plans had a default savings rate of 4% or higher, compared to only 35% a decade ago, indicating a positive shift towards higher savings rates among employees.
While financial service companies have identified retirement savings benchmarks, the right savings percentage varies based on individual needs. Factors such as age, proximity to retirement, income level, lifestyle expectations, and current debt should be considered when determining the appropriate savings rate. Certified financial planner Alyson Basso advises a target savings rate of 15%, but acknowledges that the percentage may vary based on specific circumstances.
Each client’s situation is unique, and their savings strategy should reflect their individual needs, goals, and circumstances. Older clients may need to save more aggressively to reach their retirement savings goals, while younger clients can gradually increase their savings as their income grows. Gen Z has shown a willingness to invest early, while Gen X may face challenges in catching up on their retirement savings. It is important to customize savings strategies to meet the specific needs of each individual client.
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