How 401(k) Saving Compares to Standard Advice
Workers are putting away a record share of their income for retirement.
The average savings rate in 401(k) plans rose to a record high 14.3% of income in the first three months of this year, according to a Fidelity Investments analysis of the millions of accounts it manages. That is just a shade below the 15% annual savings rate financial advisers often recommend over a four-decade career.
Savings rates are increasing even though account balances fell in volatile markets earlier this year. Most are staying the course, said Mike Shamrell, vice president at Fidelity Investments, which released the data Wednesday.
The details
Average 401(k) savings rates have risen from 13.5% in 2020, according to Fidelity, the nation’s largest 401(k) administrator with about 25,000 client companies. Today’s savings rate includes a 4.8% contribution from employers, and the rest from employee contributions.
In the first quarter, 17.4% of people with 401(k) accounts at Fidelity increased their savings rate, while 5% decreased. Less than 1% stopped saving altogether.
Financial advisers generally recommend that people save about 12% to 15% of their pay annually. Higher earners generally need to save more, since Social Security replaces a smaller percentage of their preretirement income.
At Fidelity, baby boomers saved 17.2% on average, while generation X and millennials put away 15.4% and 13.5%, respectively.
The context
Five decades after employers began using 401(k) retirement plans, the 401(k) has finally reached a tipping point. About 70% of the private-sector workforce now has access to one. More companies are automatically enrolling workers, substantially raising participation rates.
More than a third of companies that use automatic enrollment now start workers at 5% of pay or higher, up from the historical 3% norm, according to Fidelity. Many plans also automatically escalate workers’ savings rates, typically by 1 percentage point annually, often until reaching around 10% of pay.
Still, not all workers have access to or are participating in 401(k)-type plans. About 40% of U.S. households are now at risk of being unable to maintain their standard of living in retirement, according to Boston College’s Center for Retirement Research.
Fidelity said average 401(k) balances fell 3% to $127,100 since the end of last year. Among the more than 24 million people whose 401(k) accounts are administered by Fidelity, 6% changed their investment mix in the first three months of the year, with just over one-quarter tilting more conservative.
