Vanguard recently released a report titled How America Saves. It takes a detailed look at how Americans use retirement plans like the 401k. Nikki and Julie will join me to dig into some of the good and bad of the data, and more importantly, what it means for you.
Watch Now: Are Americans Saving Enough For Retirement?
You can find numerous critics of the 401k. These plans offer one of the easiest ways for people to save for their retirement. The money comes out of your paycheck and you never have a chance to spend it. You are paying yourself first.
Taking advantage of this tool only works when you use it.
Saving – The Most Critical Factor in Your Success…
Many people get hung up on the best investment, or whether to use Roth or Pretax contributions. The focus should be on how much they contribute.
In Vanguard’s How America Saves report, the people who have accumulated a balance of more than $250,000, save nearly 10% of their pay. It clearly works. But in most cases, the deferral rates are much smaller.
Income levels, age, and even gender play a significant role in how Americans are saving for their retirement. On average, Americans contribute 7.4% of their pay to their 401k plan.
Automatic Enrollment Works...
Many plans offer automatic enrollment, and newly established plans must include automatic enrollment. This means when you are eligible to participate in the plan, your employer will withhold a percentage of your pay to defer to the plan. If you don’t want to defer your pay, you must opt-out. Without this feature, many people procrastinate and don’t enroll as soon as they should.
The statistics show auto-enrollment improves participation rates of 401k plans—meaning more people are saving for their retirement.
In addition, many plans have an automatic increase feature. This means that each year, your deferral rate will increase until it reaches a certain level. For example, you may start at 6%. Over the next four years, the amount you defer will increase to 10%.
Taking Advantage of the Long-Term Value of Roth Contributions.
Not long ago, Roth contributions were made available to 401k plans. They are now possible with 403b, 457, and SIMPLE IRA plans. Roth contributions allow you to make contributions on an after-tax basis. This means there is no current tax benefit to you.
But when done correctly, the benefits of Roth contributions are significant. Over time the growth in your account can be withdrawn with no tax consequences. T
Unfortunately, the number of people—especially younger workers—who take advantage of the Roth features is disappointing. The longer you have for those assets to compound, the greater the potential benefits.
According to Vanguard’s data, only 17% are taking advantage of the Roth-type accounts. Sadly, only 18% of the participants under age 25 are using the Roth features, while 22% of the people aged 25-34 are using them. Those are the two age groups that stand to benefit the most.
Saving Effectively For Retirement...
In their study, Vanguard suggests for people to save effectively for their retirement they should strive for these goals. Keep in mind, these rates include both what you save and what your employer contributes.
- For people earning less than $50,000, save 9+%
- For people earning between $50,000 and $100,000 save 12+%
- For people earning over $100,000 save 15%.
The chart below shows most people are not saving effectively for the next chapter in their lives.
Make Saving a Higher Priority
There is a need to balance what we do today with what is going to happen in the future. Unfortunately, the statistics tell us many people need to make saving for retirement a higher priority. We face many challenges and questions as we look ahead toward retirement. And the best way to build flexibility and independence for the unknown is to save for your future.
It’s a balancing act that can be complex. The good news: You don’t have to tackle this on your own. We can help you. Simply complete the form to get in touch with one of our financial advisors.
Appearing in This Video...
Julie Daley, RICP®
Juley is a financial advisor in St. Clairsville, Ohio.
Nikki Lude, CFP®
Nikki is a financial planner in Woodsfield, Ohio.
Neal Watson, CFP®
Neal is a financial planner in Marietta, Ohio.