When it comes to retirement savings, 401(k) plans are an essential component for most Americans. 401(k) plans allow workers to save a portion of their pre-tax income and invest that money to grow over time. However, determining how much to contribute can be daunting, especially in times of economic uncertainty. Fortunately, according to Vanguard’s annual “How America Saves” report, Americans continued to save a record amount last year.
Workers continue to save at record rates
The report found that despite the economic uncertainties, the average worker last year was able to contribute an impressive average of 7.4% of their pay to their 401(k) accounts last year, matching the record set in 2021. The median contribution rate was 6.4%.
When taking into account both employee and employer contributions, the average total participant contribution rate in 2022 was 11.3%, with a median rate of 10.6%. These rates have remained relatively consistent for the past five years.
While the contribution rate is at record highs, how much a worker can save depends on factors such as age, income, and job tenure.
Contribution by age
According to the latest data, individuals under the age of 25 who contribute to their 401(k) plans average a contribution rate of 5.2%, the lowest of all age groups. The contribution rate continues to rise as workers age, with those 65 and older contributing 9.0%, the highest of all age groups.
Contributors who are older tend to have more work experience, higher salaries, and less debt. Since they typically have a larger disposable income, they can contribute larger amounts to their 401(k)s. Additionally, there is the option to make catch-up contributions, which is an added benefit for those who are older, and allows them to put away potentially thousands of dollars more annually.
Average employee 401(k) contribution rate: 7.4%
| Age | Contribution rate |
|---|---|
| <25 | 5.2% |
| 25-34 | 6.7% |
| 35-44 | 7.0% |
| 45-54 | 7.6% |
| 55-64 | 8.7% |
| 65+ | 9.0% |
Contribution by income
Workers with an income of less than $15,000 contribute an average of 5.5%, while those in the $100,000-$149,999 income range contribute an average of 9.2%, the highest of all groups. The amount drops to 8% for those making $150,000 or more. This could be due to the fact there is a maximum contribution limit for retirement accounts. Interestingly, it’s the $15,000-$29,000 income group that contributes the lowest amount, at 4.7%.
Those in higher income brackets tend to contribute more than those with lower incomes, since they typically have more disposable income and can afford to save more.
| Age | Contribution rate |
|---|---|
| <$15,000 | 5.5% |
| $15,000-$29,999 | 4.7% |
| $30,000-$49,999 | 5.5% |
| $50,000-$74,999 | 7.0% |
| $75,000-$99,999 | 8.2% |
| $100,000-$149,999 | 9.2% |
| $150,000+ | 8.0% |
Contribution by job tenure (years)
Workers with longer tenure at a job often contribute more to their 401(k) plans than their counterparts with shorter tenure. As workers gain more experience and earn higher salaries, they can often afford to contribute more to their plans.
Furthermore, workers who have been with a company for a long time are more likely to be in higher-level positions, which come with higher salaries and better benefits. All of these factors can combine to put workers with longer tenure in a better position to build up their retirement savings.
| Years | Contribution rate |
|---|---|
| 0-1 | 5.4% |
| 2-3 | 7.0% |
| 4-6 | 7.6% |
| 7-9 | 8.0% |
| 10+ | 8.7% |
Workers still aren’t saving enough
The Vanguard report reveals that despite the impressive numbers in 401(k) participation and employee contribution rates, workers are still not saving enough for retirement.
To ensure a comfortable retirement, Vanguard recommends that participants save a minimum of 12% to 15% of their pay. However, the average total contribution rate is currently at 11.3%, slightly below the recommended amount.
How to save more for retirement
Saving enough for retirement means starting early, setting clear goals, and being disciplined about putting away a portion of each paycheck. One of the first steps toward saving more is to create a budget and find ways to reduce unnecessary expenses.
You might consider delaying your retirement or even continuing to work part time to accrue extra income. It’s worth exploring your investment options, and consider opening an account besides an employer-sponsored 401(k), such as a Roth IRA. Regardless of the approach, saving for retirement requires discipline and planning, but the long-term benefits are undoubtedly worth the effort.
Even though workers with lower incomes and less job tenure have less opportunity to save for their retirement, it’s important to remember that any amount saved towards a 401(k) can make a difference in the long run. Investing in a retirement account should be a priority for everyone. All employees should regularly review their retirement savings plans and make necessary adjustments to ensure a secure financial future.
