The 401 (k) Average Savings Rate: Will It Really Fund Retirement?

How much are you saving for retirement? Experts recommend cutting at least 10% of your salary, but a recent report from the Plan Sponsor Council of America (PSCA) suggests that many Americans are falling short of that target.

The PSCA, which helps employers manage their retirement plans, finds that the average American worker contributes only 7.6% of their income to a workplace retirement plan. And you must ask yourself: is this enough to ensure a comfortable retirement?

As you will see below, a closer analysis of the numbers suggests that it is possible to fund a decent retirement by contributing less than 10% of your salary, although there are a few important caveats. For one thing, you need to start saving in your 20s. You must also earn more than 5% in matching employer contributions.

And even then, you will have no financial leeway to deal with unexpected circumstances. This is a difficult question because there are many factors that could derail your savings efforts and financial security, such as health problems, financial and economic cycles, and unexpected changes in your job.

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Saving at a higher contribution rate adds flexibility to help you deal with these uncertainties. But if times are tight and you can only afford a contribution of around 8%, here’s a look at what your retirement could look like.

Projected retirement savings income

Suppose you make $ 54,236 per year, which is the median salary for a worker aged 25 to 54. The PSCA report sets the employer’s average matching contribution at 5.3%. That, combined with your 7.6% contribution, puts almost $ 7,000 a year into your 401 (k). Invest these contributions primarily in stocks to earn an average of 7% per year, and your retirement account balance should reach around $ 665,000 over 30 years.

These $ 665,000 in retirement savings are expected to provide income of $ 23,000 to $ 27,000 per year. It’s based on the idea that it’s safe to withdraw 3.5% to 4% of your savings balance each year in retirement. At this payout rate, your money should last as long as you do, even in a down market and tough economic cycles.

Social security income

You should also have Social Security benefits coming to supplement your savings income. In its current form, the program replaces about 40% of the average worker’s income. This guideline is only valid if you wait until you have reached full retirement age (FRA) to claim your benefits. Claim earlier and your benefits will be lower. Assuming you were born after 1959, your FRA is 67.

Of an annual salary of $ 54,236, 40% equates to approximately $ 21,700.

Total projected income at retirement

Assuming that you draw $ 25,000 annually from your savings and receive $ 21,700 from Social Security, this represents total retirement income of $ 46,700. It might not sound like a lot, but it’s 86% of the working salary we started with. If your living expenses drop slightly in retirement because you paid off a mortgage or stopped contributing at retirement, you could possibly squeak 86% of your working income. But it’s a tight fit: so tight that this shot doesn’t allow for some fairly common scenarios.

Things that can go wrong

Here are five of those common scenarios, each of which could shatter your retirement plan.

1. You have less than 30 years to save. If your deadline is less than 30 years and you haven’t already saved, you will need to contribute much more than 7.6% of your income to accumulate enough savings to top up enough Social Security to cover your living expenses.

2. Your match with the employer is less than 5.3%. A lower consideration from the employer would require a higher contribution from you to reach the target savings balance.

3. You have to retire early because of work or health issues. If you retire early for any reason, your Social Security benefits will be lower. This reduction can reach 30%. The earlier you claim, the greater the reduction.

4. You have an emergency and need to withdraw funds from your retirement account. If you borrow or withdraw funds from your pension plan, you will need to significantly increase your contribution rate to get back on track.

5. Medical expenses in retirement increase your cost of living. You may find that replacing 86% income is not enough. There can be many reasons, but high medical bills are a common culprit. You can protect yourself against this by putting extra money into a health savings account.

Save more than you think you need

For most savers, the average 401 (k) savings rate of 7.6% will not be enough. The numbers can hardly work on paper, and only for young workers. But the margin for error is too small to provide peace of mind.

If you can, target a savings rate of 10% to 15%, not including your employer’s match. If that’s not feasible, plan to increase your premium rate every year or whenever you get a raise. The sooner you start this habit, the easier it will be to achieve the comfortable retirement you want.