Most of us have heard countless times how important it is to save for retirement. In fact, it seems that more and more people are following that advice.
Vanguard, a major investment company, states in its annual report,How America Saves Money The main takeaway from this week’s report? Participants in the company’s 401(k) plans are contributing more money than ever before: 7.4% of their income in 2023, and nearly 12% when employer contributions are included.
The biggest catalyst is something called automatic enrollment: if you start working for a company that offers a 401(k) and you don’t enroll yourself, your employer will enroll you for it. In fact, recent federal legislation is going to make that mandatory.
“As a result, participation rates are the highest ever recorded in How America Saves, with the average plan participation rate now standing at 85 percent,” said Jeff Clark, head of defined contribution research at Vanguard, who wrote the report.
Clark added that the benefits don’t end there: auto-enrolment not only increases the number of people who participate, it also increases the amount people contribute.
“Auto-enrollment plans have a higher rate of employee default — default rates of over 4 percent,” Clark said.
He said two-thirds of participants now have professionals like David Deming, a certified financial planner and founder of Deming Financial, manage their savings.
“There’s a lot of younger people coming in, it’s a different generation,” Deming said. “They’re more connected and more savvy because of the internet and everything.”
He said many young people are taking better advantage of benefits offered by their employers.
All of this is good news, said Richard Johnson, a senior fellow at the Urban Institute. But he added, “I think the basic story remains the same, which is that retirement prospects are pretty bleak for a lot of people.”
His other point is that the report only looked at people who actually have retirement accounts, which represents just over half of U.S. households.
Johnson said that saving just 7.4% of your retirement income, as the Vanguard report found, is still not enough to be financially secure in retirement. Workers should aim for closer to 10%, he said.
“Good news alone is not enough to fundamentally change this situation,” Johnson said.
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