Here's How Much Average Workers Save in Their 401(k)s

Are you contributing enough to your retirement fund?

Katie Brockman
Katie Brockman
Jun 30, 2017 at 7:26AM
Investment Planning

Experts have long recommended that investors saving for retirement should contribute about 10%-15% of their income toward retirement. But is that how much the average employee saves each paycheck?

According to a new report by Vanguard, workers aren't saving anywhere near that amount. Among the brokerage's 4.4 million defined-contribution plan participants, the average contribution was 6.2% of annual income. That number jumps to 10.9% once you factor in employers' matching contributions. (Note that the median age of the participants was 45, and the median income was $65,000, so you may not be able to compare yourself to the sample group on an apples-to-apples basis.)

Those savings rates are far below the recommended 15% suggestion. But are they enough to ensure a comfortable and financially secure retirement?

women putting money into a piggy bank

Image source: Getty Images.

What you'll need to retire comfortably

There's no magic percentage that everyone should save in order to fund their dream retirement. For some people, 6% may be enough. Others may need to contribute more than 15% to retire comfortably.

What you'll need will depend on a wide variety of factors, and age is arguably the most important. When you're young, you can take advantage of compound interest, and even small contributions add up over time. If you're closer to retirement age, your money will need to work a little harder to keep up.

Whether or not you have a spouse who works is also an important factor, since his or her 401(k) can significantly add to your overall retirement fund. You'll also need to consider whether you'll be receiving Social Security benefits and, if so, how much you'll get. Your retirement lifestyle will also be a major factor, because you'll need more money if you plan to travel the world and buy a yacht than if you're expecting to stay home and simply enjoy your free time.

One of the easiest ways to check whether your savings are on track is to plug your numbers into a retirement calculator. While this method isn't foolproof, it will give you an idea of whether you're saving enough or should push yourself (and your wallet) to put aside more.

How to save more each month

If you're worried that you're not saving enough to afford retirement, you're not alone: About half of non-retired adults aren't sure that they're financially prepared to retire, according to the American Institute of CPAs.

There are a few things you can do, however, to beef up your retirement fund and ease your financial worries.

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1. Pay yourself first

Think of your retirement fund as if it's just another bill to pay. Most employers allow you to automatically transfer a portion of your paycheck to your 401(k), so you don't even need to think about it. When you don't see that money in the first place, it's easier to make saving a priority, rather than simply throwing whatever you have left at the end of each month into your retirement fund.

2. Consider 401(k) fees

Many people don't realize it, but your 401(k) could be costing you thousands of dollars in hidden fees. 401(k) providers don't make this information easily accessible, so most people don't even realize they're paying fees at all (or they grossly underestimate how much they're paying). 

Along with the expense ratio (which covers basic operating expenses), there are 28 other types of fees you may be incurring without even knowing it. To find out how much you're paying in fees, you have two options: take a look at your plan's prospectus or talk to your plan administrator.

A prospectus is a document that lays out all the details of a mutual fund's objectives, strategies, fees, and past performance. You can obtain a copy from your plan administrator. While valuable, a prospectus is filled with financial jargon and can be difficult to decipher, so you can also talk directly to your plan administrator to discuss your 401(k) fees.

Once you know how much you're paying, the next step is to determine whether you're paying too much. You'll never find a 401(k) that charges zero fees, and the average expense ratio among mutual funds is around 1.2%. If you're paying more than that, take a look at the individual investments within your 401(k) and see if you can move them into funds with fewer fees attached.

3. Take advantage of all the perks

If your company offers matching contributions for 401(k) plans, take full advantage of them. It's essentially free money, so contribute as much as you can to get the most of what your employer is offering.

Also, 401(k)s allow you to contribute more money than traditional IRAs and Roth IRAs. While the yearly contribution limit for Roth and traditional IRAs for 2017 is $5,500 (or $6,500 if you're aged 50 or older), the limit for 401(k)s is $18,000 (or $24,000 if you're 50 or older).

Saving for retirement is hard (because we can all think of far more fun things to spend money on), but it's crucial. If you're behind on your savings, start playing catch-up now so that when it comes time to retire, you'll be able to relax and leave your money worries behind.