Your 401(k) is up, and a new report shows increased savings. But Americans need to do more

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How's your 401(k) looking? A new report shows Americans are saving more, but probably need to do even more.

Vanguard has released its annual report, How America Saves 2024. Vanguard and Fidelity are the two biggest sponsors of 401(k) plans, and this is a snapshot of what nearly five million participants are doing with their money.

The good news: stock market returns are up and, thanks largely to automatic enrollment plans, investors are saving more than they did in the past.

The bad news: account balances for the median 401(k) of a person approaching retirement (65+) remains very low.

The takeaway: Americans are still very reliant on Social Security for a large chunk of their retirement.

Higher returns, participation rates, savings rates 

Why do we care so much about 401(k) plans? Because it's the main private savings vehicle Americans have for retirement. More than 100 million Americans are covered by these "defined contribution" plans, with more than $10 trillion in assets.

First, 2023 was a good year to be an investor.  The average total return rate for participants was 18.1%, the best year since 2019.

But to be effective vehicles for retirement, these plans need to: 1) have high participation rates, and 2) hold high levels of savings.

On those fronts, there is good news. John James, managing director of Vanguard's Institutional Investor Group, called it "a year of progress."

Plan participation reached all-time highs. Thanks to a change in the law several years ago, a record-high 59% of plans offered automatic enrollment in 401(k) plans. This is a major improvement: ipreviously, enrollment in 401(k) plans were often short of expectations because investors had to "opt-in," that is they had to choose to participate in the plan.  Because of indecision or simple ignorance, many did not. By switching to automatic enrollment, participants were automatically enrolled and had to "opt-out" if they did not want to participate.

The result: enrollment rates have gone up. Plans with automatic enrollment had a 94% participation rate, compared with 67% for voluntary enrollment plans.

Participant saving rates reached all time highs. The average participant deferred 7.4% of their savings. Including employee and employer contributions, the average total participant contribution rate was 11.7%.

A few other observations about Vanguard's 401(k) plan investors:

They prefer equities and target date funds.  They love equities over bonds or any other investments. The average plan contribution to equities is 74%.  A record-high 64% of all 2023 contributions went into target-date funds, which automatically adjust stock and bond allocations as the participant ages.

They don't trade much. In 2023, only 5% of nonadvised participants traded within their accounts; 95% did no trading at all. "Over the past 15 years, we have generally observed a decline in participant trading," Vanguard said, which it partially attributed to increased adoption of target-date funds.

Despite gains in the market, account balances are still low

In 2023, the average account balance for Vanguard participants was $134,128, but the median balance (half had more, half had less) was only $35,286.

Why such a big difference between the average and the median? Because a small group of investors with large balances pull up the averages. Forty percent of participants had less than $20,000 in their retirement accounts.

Distribution of account balances

• Less than $20,000     40%
• $20,000-$99,999        30%
• $100,000-$249,900  15%
• $250,000 +                  15%

Source:  Vanguard

Median balances for those near retirement are still low

A different way to look at the problem is to ask how much people who are retirement age have saved, because it's an indication of how prepared they are for imminent retirement.

Investors 65 years or older had an average account balance of $272,588, but a median balance of only $88,488.

A median balance of $88,488 is not much when you consider older participants have higher incomes and higher savings rates. That is not much money for a 65-year old nearing retirement.

Of course, these balances don't necessarily reflect total lifetime savings. Some have more than one retirement plan because they had other plans with previous employers. Most do have other sources of retirement savings, typically Social Security. A shrinking number may also have a pension. Some may have money in checking accounts, or have stocks or bonds outside a retirement account.

Regardless, the math does not look great

So let's do some retirement math.

A typical annual drawdown for a 401(k) account in retirement is about 4%. Drawing down 4% of $88,488 a year gets you $3,539 every 12 months.

Next, Social Security. As of January 2023, the average Social Security benefit was almost $1,689 per month, or about $20,268 per year.

Finally, even though pensions are a vanishing benefit, let's include them.

According to the Pension Rights Center, the median annual pension benefit for a private pension is $9,262 (government employees have higher benefits).

Here's our yearly retirement budget:

• Personal savings $3,539
• Pension                 $9,262
• Social Security   $20,264
• Total:                   $33,065

It's certainly possibly to live on $33,000 a year, but this would likely only work if you own your home, have low expenses and live in a low-cost part of the country.

Even then, it would hardly be a robust retirement.

And these are the lucky ones. Only 57% of retirees have a tax-deferred retirement account like a 401(k) or IRA. Only 56% reported receiving income from a pension.

And that extra income largely determines whether a retiree feels good or bad about their retirement.

In 2023, four out five retirees said they were doing at least okay financially, but this varied tremendously depending on whether retirees had sources of income outside of Social Security. Only 52% of retirees who did not have private income said they were doing at least okay financially.

What can be done? 

To have a more robust retirement, Americans are just going to have to save more.

One issue is investors still don't contribute the maximum amount allowed. Only 14% of participants saved the statutory maximum amount of $22,500 per year ($30,000 for those age 50 or older). The likely reason: most felt they couldn't afford to.

However, only 53% of even those with income over $150,000 contributed the maximum allowed.  Given that the employee match is "free money," one would think participants in that income bracket would rationally choose to max out their contribution. The fact that many still don't suggests that more investor education is needed.

Regardless, it's very dangerous to assume that retirees are going to be bailed out by an ever-rising stock market. Another year anywhere near 2022, when the S&P 500 was down 20%, and investor confidence in their financial future will likely deteriorate.