We’ve all heard the complaints about the cost of living in the U.S. Grocery prices, for example, are up a punishing 25 percent from just a few years ago. Not to mention energy prices, housing, and so on. Consumer credit card debt is also at an all-time high, an indication that folks are having to borrow money to cover everyday living expenses.
So, given all that, are Americans saving any money? Well, the answer may surprise you. Mutual fund company Vanguard publishes an annual report entitled How America Saves. They track savings behavior of Americans through the 401(k)and 403(b) plans where they serve as recordkeeper. The most recent report covers five million workers in the U.S.
Vanguard reports that participation rates in plans have never been higher. In the latest survey, 85 percent of workers who have access to a retirement plan contribute to the plan. Twenty years ago, that participation rate was only 65 percent! This may be in part due to the feature of auto-enrollment. Often the requirement to participate in a plan is one year of full-time service. Historically, after that one-year period, the participants then had to actively make the election to participate, and many failed to do so. Currently, however, 60 percent of Vanguard plans automatically enroll the participant once they obtain eligibility.
Savings rates for participants are also at an all-time high. The average contribution rate from employees’ paychecks is 7.4 percent. When combined with the employer’s contribution, the total rate averages 11.7 percent of pay. As a general guideline, Vanguard suggests a target savings rate of 12 to 15 percent of your pay to provide a comfortable retirement.
In addition to auto enrollment, many plans now offer an auto escalate feature. Suppose an employee begins contributing four percent of their pay to the plan. After a specified period, generally one year, the contribution rate automatically adjusts up to, say 5 percent. Future periodic increases continue as well.
Of course, employees always have the option to opt out of auto escalate or auto enroll. But these gentle “prods” appear to be having a positive impact on both participation and saving rates for employees covered by such plans.
While these are positive improvements in the retirement plan landscape, I’ll point out a couple of concerns. First, 82 percent of plans were offering a Roth savings option in 2023. However, only one in six participants offered the Roth option take advantage of it. Roth accounts offer a long -term tax benefit, but do so at the expense of giving up a short-term tax deduction. Some participants purposely avoid the Roth due to the increase in taxes they would incur currently. They feel they’re already paying too much! But for many participants, slicing off a portion of your deferral into a Roth account could provide significant tax benefits down the road. A lack of understanding of the Roth benefits is a major explanation of the low usage rate of Roths.
Second, only about half of the U.S. work force has access to the type of plans discussed here. Vanguard reports that workers with access to these types of plans are 14 times more likely to be saving for retirement than workers with no such access! The net result is a large segment of workers have Social Security as their only savings plan for retirement.
To summarize, despite the high cost of living in the U.S. and the runup in credit card debt, many American workers are still managing to sock away some funds for retirement. Remember that old saying that both death and taxes are inevitable. For most of us, so is retirement. So prepare for it!
