Americans Saved a Record Amount in Their 401(k)s Last year, Despite Stock Market Losses

Retirement savings has been a hot topic in recent years, particularly with the uncertainty of the pandemic. Many people have been forced to prioritize their spending and saving habits, and while some have seen their retirement accounts take a hit due to market fluctuation, others have actually managed to save at record levels. Despite high inflation and a volatile stock market, Americans saved and invested more than ever last year.

Workers stay the course when it comes to savings

According to Vanguard's annual "How America Saves" report, even in the face of economic uncertainty, Americans have been able to stay focused on their financial goals. Workers managed to contribute an average of 7.4% of pay to their 401(k) accounts last year, which ties 2021's record.

One key factor is that many employers now automatically enroll their workers in 401(k) plans as soon as they start working. The plans are configured for workers to automatically save a percentage of their income, which workers have the option to adjust upward if they choose to. It takes the effort and willpower out of the savings process, making it easier for workers to resist the temptation to spend their income elsewhere.

On top of the average 7.4% contributed by workers, including the company match, the total average contribution rate was 11.3%. In 2022, the average account balance for Vanguard participants was $112,572, while the median balance was $27,376.

However, the average account balances experienced a decline of 20% since the end of 2021. This dip is primarily due to the downturn in both equity and bond markets last year. The S&P 500 experienced a significant decline of almost 20%, U.S. bonds dropped by 13%, and most target-date funds fell somewhere in the middle.

Surprisingly, despite these losses, only a small 6% of investors chose to trade their investments last year, a drop of 4% from 2020. Trading activity in 2022 reached the lowest level in close to two decades.

Target-date funds are popular

Target-date funds have become an increasingly popular option for retirement account investors, and this trend shows no signs of slowing down. In fact, a staggering 83% of all participants in the study used target-date funds last year. What's more, 71% of those participants had their entire account invested in a single target-date fund.

This trend is likely due to the fact that investors are recognizing the benefits of a well-diversified portfolio that is automatically adjusted over time to become more conservative as retirement approaches.

Another interesting aspect of this trend is that it seems to be leading to a decline in participant trading. Over the past 15 years, there has been a significant drop in trading activity, and only 2% of participants holding a single target-date fund traded in 2022.

Savings still not enough

Despite the record highs in participation, deferral rates, and the use of professionally managed allocations last year, the Vanguard report found that workers are still falling short when it comes to saving for retirement.

Vanguard recommends that participants should save at least 12% to 15% of their pay to meet their retirement goals.

With the average total contribution rate at 11.3%, it is slightly lower than the recommended amount. The study found that only 20% of the participants require a slight boost of just 1% to 3% to reach their targeted savings rate.

Why investing in a 401(k) is important

It's essential for individuals to take stock of their financial priorities. Saving enough for retirement shouldn't be an afterthought or a luxury, but rather a necessity.

A 401(k) is a powerful savings tool that offers significant tax benefits and potential for compound interest. Setting a budget and contributing a portion of income consistently over time can result in having a substantial nest egg for your retirement. Additionally, many employers offer matching contributions, further boosting your account balance.

How to save more for retirement

When it comes to saving for retirement, planning ahead is crucial. Establishing a mindset of consistent saving can go a long way in helping individuals meet their retirement goals. Even small amounts of money can add up over time, as compound interest does its work.

In addition to employer-sponsored 401(k)s, traditional or Roth individual retirement accounts (IRAs) can help you maximize your savings potential. Another tactic is to create a budget and regularly review and adjust it to prioritize saving for retirement.

Additionally, reducing unnecessary expenses, such as dining out or buying non-essential items, can free up money that can be redirected towards retirement savings. These tips can help ensure you have a comfortable retirement and less financial stress.

As retirement approaches, the money saved in a 401(k) can be used to supplement income and provide financial security. While there are other types of retirement accounts and investment options available, a 401(k) remains a popular choice for its simplicity and potential long-term growth. Starting early, staying consistent, and contributing 12%-15% of your pay can make a significant impact on future financial stability.