Here's the Vanguard 401(k) Participation Rates by Income Level, According to a New Report. How Do You Measure Up to Your Peers?

The 401(k) is perhaps the most popular defined contribution plan available. It comes with a host of benefits, including employer match, competitive contribution limits compared to other plans, and rollover options for workers switching jobs, among others. It's no wonder that millions of people rely on them to save for retirement.

However, participation rates vary by income level. A recent report from Vanguard, a leading investment advisory company, sheds more light on this fact and can help you get a sense of what your peers are doing, which could, in turn, help guide your retirement planning strategy. Let's examine what this report says.

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Higher income equals higher participation rates

Vanguard releases its "How America Saves" report annually. It examines the financial trends and habits of nearly 5 million of its clients, many of whom are enrolled in defined contribution plans, such as 401(k) plans. They aren't necessarily representative of the rest of the population. That said, Vanguard's data shows what many people are doing with their money, and, among other things, whether they are opting for defined contribution plans.

A nifty feature of the report is that it breaks down participation rates in defined contribution plans by demographics, allowing you to compare yourself with your peers. Vanguard released the latest iteration of this report this year, using numbers (actual and estimated) from 2024. And it reveals that those with higher incomes are more likely to have a 401(k). Here is a breakdown of participation rate by income level, based on Vanguard's data.

Data source: Vanguard Group.

What to do if you aren't saving for retirement

It probably comes as no surprise to you that people with higher incomes -- who have more to spend and to save -- are more likely to be putting money into retirement accounts. If you are among these higher earners and are regularly setting money aside, for a 401(k) or another plan, keep at it! 

But what about those who aren't? Of course, any single person's highly specific set of circumstances gets lost in the data. There may be a good reason why you aren't putting money into a 401(k) that applies to you and you only. For those who aren't doing so because they believe they don't have the funds, that's understandable.

However, it's essential to keep a few things in mind. First, any amount you put into your 401(k) and that is invested in productive assets, like stocks, will be growing while you sleep. By not saving money, you are missing out on years of potential returns. Time is your best friend on the stock market. Money invested in ETFs that track major market indexes is bound to generate strong returns over the long run. And with many online brokers now offering fractional shares, you can invest in top stocks or ETFs even with $1, regardless of their actual share prices.

Suppose you are 35 and decide to save $1 every day and invest $365 at the beginning of every following year for 30 years. With an 8% annual return -- a reasonable estimate of the stock market's long-term performance -- you'd have $48,329.11. That's not enough to retire on, but it's a lot better than nothing. And employer matching is one of the best features of a 401(k). By not participating, you are essentially forgoing free money and years of returns on that free money.

Let's do the same exercise as above, but this time with employer matching, assuming that for every dollar you put into your 401(k), you receive the same amount up to a certain percentage of your salary. So, you'd be investing $730 at the beginning of every year for 30 years. That would amount to $96.658.22 with the same annual return once all is said is done.

Again, probably not enough for most Americans to live on in retirement, but it's better than nothing. Here's the point of this exercise. Though it may be hard to set money aside for retirement because of your finances, every little bit you save helps, especially when you take employer matching and stock market returns into account.

Creating a budget, if you don't already have one, can help you set aside any amount of money you can for a 401(k). Budgeting can also help those with higher incomes who feel they should be setting aside money for retirement but aren't doing so. Here's the bottom line. Saving for a retirement that is years, perhaps even decades, away may seem like an expensive proposition. But it might be even more costly not to do it.