According to a new report by Bankrate.com, 23% of working Americans increased their retirement savings contributions in the past year. This is the highest percentage in Bankrate's six years of collecting such data, and represents a major boost from previous years. Here's why Americans are saving more for retirement, and why you should consider doing the same.
Americans have gotten more serious about their retirement savings
Nearly one-quarter of American workers have increased their retirement savings contributions during the past year alone. This is up significantly from the 2011 report, which found that just 15% of Americans had increased their savings rate, and 29% had cut their savings rate in the previous year.
Millennials are doing an especially good job, with 27% of the 18-36 age group reporting a recent increase in retirement contributions.
Furthermore, while 5% of American workers say that they're not saving anything for retirement, this is down from 10% just two years ago. Overall, it's fair to say that Americans are doing a much better job of saving for retirement than they were just a few years ago.
A big reason for the uptick in retirement savings can be attributed to the strong economy. According to Greg McBride, CFA, Bankrate.com's chief financial analyst, "Working Americans are increasing their retirement savings more and more as the economic recovery continues, whether by saving the same percentage of higher earnings or a higher percentage of the same earnings."
Why you should be saving more for retirement
Americans are living longer lives, and Social Security isn't likely to be enough to sustain the quality of life you want, especially if your other savings runs out. After all, Social Security is designed to replace just 40% of the average worker's income, and most experts advise that you'll need about 80% of your pre-retirement income if you don't want to sacrifice your lifestyle.
In addition, the current retirement nest eggs of most Americans aren't nearly enough to produce the sustainable retirement income that's necessary. A Vanguard report found that 401(k) holders approaching retirement (ages 55-64) had an average balance of $177,805. This may sound like a lot, but this only translates to about $7,100 in sustainable retirement income, according to the 4% rule of retirement (and many experts say that the 4% rule isn't conservative enough).
How much should you be saving?
I generally suggest that workers aim to save 10% of their salary in a 401(k), IRA, or other retirement account, not including any matching contributions from the employer.
However, you don't need to get there right away. One strategy is to increase your contribution rate by 1% of your salary each year. So, if you're contributing 4% this year, increase it to 5% in 2018, 6% in 2019, and so on – until you reach 10% or whatever percentage you'd like to contribute in perpetuity. Many plans will let you do this automatically.
The long-term impact of saving more
Let's consider a simplified example to illustrate why this is so important. We'll say that you earn $50,000 and your employer is willing to match your 401(k) contributions, up to 5% of your salary. Assuming 2% average salary increases throughout your career and 7% average annual returns, contributing just enough to take full advantage of your employer's match could result in a nest egg of $580,000 after 30 years.
On the other hand, let's say that you want to be aggressive about saving for retirement, and save 10% of your salary, in addition to the 5% employer match. Using the same assumptions, this would produce a $870,000 balance after 30 years.
Using the admittedly imperfect 4% rule of retirement, the first case would translate to annual sustainable income of $23,200, while the more aggressive saver would be able to generate $34,800 annually -- a $11,600 difference that could have a big impact on your quality of life in retirement.