Vanguard recently released its annual retirement savings report, shedding light on the savings habits of American workers participating in 401(k) plans. Vanguard's "How America Saves 2016" study finds that Americans' balances in 401(k) plans slipped in the past year for the first time in years. With the current bull market in stocks having lasted longer than average, are you saving enough to put you ahead of your peers?
Coming up shy
Vanguard calculates that the average American came into 2016 with $96,288 saved in their 401(k) plan; however, averages can be deceiving because they can be significantly skewed by high and low numbers. It can be more useful to consider median figures, rather than averages.
The median amount that Americans saved in 401(k) plans, or the midpoint of balances, tells a very different story. Median 401(k) balances were just $26,405 exiting 2015, according to the study.
Average balances within 401(k) plans fell 6%, or a median 11%, last year. Vanguard blames the drop-off on tough markets, rising adoption of automatic enrollment plans, and low contribution rates by participants.
Last year, the average participant earned an anemic -0.4% return, which was a far cry lower than the five-year average annual return of 7.3%. Automatic enrollment in employer plans also reduces overall 401(k) values because it means the calculations include many more accounts with small balances than in the past. Auto enrollment plans often start off at low contribution rates for new participants, which are far south of the 10% rate recommended by industry watchers. Overall, American workers are contributing an average 6.8% and a median 5.9% to their accounts. To put that in perspective, consider that average contribution rates peaked at 7.3% in 2007.
The findings suggest that retirement savings risk coming up short for retirees in their golden years. Withdrawing no more than 4% of your balance per year in retirement is a common rule of thumb, and at that withdrawal rate, Americans with these balances would only be withdrawing an average and median $3,851 and $1,056 per year, respectively. Obviously, that's not going to be enough to live on in retirement.
Making changes now
The average person participating in plans used in Vanguard's study was age 46 and earned $73,000. If you're in a similar age range and income bracket, and you're short of the average and median balances of your peers, now is a good time to make up lost ground.
Using low-fee ETFs and mutual funds and taking a buy-and-hold approach can reduce fees that can drag down balances in the future, so make sure you evaluate your investments with value-minded, long-term focus.
The biggest boost to your account balance, however, will come from systematically increasing your contribution rate every year. Employees often forget to increase their contribution rate, and as a result, few Americans contribute the maximum annual contribution that's allowed every year.
In 2016, employees can save up to $18,000 in a 401(k) plan, and if they're over 50, they can contribute an additional $6,000. Vanguard reports that only 12% of plan participants contributed the maximum allowed last year. If you're not maxing out contributions, and your contribution rate is south of the recommended 10% level, creating a plan to increase your current rate in equal increments over the next few years may make the most sense. Increasing contributions by a little bit every year can pay off big over time -- thanks to compound interest -- without imploding your budget.