If you have a 401(k) plan through your job, your goal should be to max out your contributions or get as close to maxing out as possible. Now given that 401(k) contribution limits currently sit at $22,500 for workers under age 50 and $30,000 for those 50 and over, maxing out a 401(k) may be difficult these days. But in that case, your goal should be to consistently increase your contribution rate.
Unfortunately, recent data from Bank of America shows that 401(k) contribution rates shrunk in 2022. As of this past December, the average contribution rate across all participants was 6.4%, down from 6.6% in December 2021.
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Not only that, but more than 25% of 401(k) participants contribute 3% or less of their income toward retirement savings. And 43% of baby boomers -- those with little time to catch up on building a nest egg -- are only contributing 3% of their income or less.
Inflation may have stunted savers
In 2022, consumers were forced to grapple with soaring inflation all year long. And that could explain why 401(k) plan contributions were down compared to 2021.
In 2021, not only were living costs lower across the board, but many workers were privy to stimulus aid that no doubt gave them more financial leeway. In 2022, there was no federal stimulus aid to be had, though some states issued rebates to residents to help them cope with inflation.
But while it's easy to see why 401(k) contribution rates shrunk in 2022, it's still not a good thing. Many workers don't realize just how reliant they'll be on their savings once their careers wrap up. And saving less instead of more could spell the difference between retiring in comfort and struggling financially.
Do your best to ramp up in 2023
Maybe you had to slow down on 401(k) contributions last year to cope with inflation. But living costs are already starting to come down this year, so your best bet is to map out a clear budget that prioritizes retirement savings.
Another option? Join the gig economy. The U.S. labor market is loaded with jobs, and if you pick up work on the side, you can use your earnings to fund your retirement savings -- and perhaps make up for lower contributions in 2022. Along these lines, because jobs are plentiful these days, if yours doesn't pay you a high enough salary to make it possible to boost your retirement plan contributions, you may want to dust off your resume and seek out another one with better pay.
Many workers don't realize that Social Security will only replace about 40% of an average earner's preretirement wages. And that doesn't even account for potential benefit cuts. Most seniors need far more income than that to maintain a decent standard of living. And so a large chunk of your retirement income may need to come from your savings. That's why it pays to do what you can to ramp up on 401(k) contributions -- even if it means making some sacrifices along the way.
