The good news for retirement savers who use 401(k) plans and similar workplace retirement accounts is that the improving stock market is causing account balances to rise. The average 401(k) is up an average of $7,250 since the end of 2022 – a gain of 9.6%. This is evident from a report by Bank of America.
The report also shows that 401(k) plan participants contribute an average of 6.5% of their income. Using data from Vanguard, the Bureau of Labor Statistics (BLS), and the reported BofA contribution rate, SmartAsset calculated exactly where your 401(k) balance might be based on a few different hypothetical ages.
a Financial Advisor can help you plan withdrawals from a retirement account, such as a 401(k). Talk to a financial advisor today.
Rising account balances versus more hardship
While account balances have risen, the number of workers taking hardship withdrawals from 401(k)s is up 36% from the second quarter of 2022. This is as Americans continue to face rising interest rates, as well as housing and housing food costs that have risen steadily amid the crisis. recent inflation.
“The data from our report tells two stories: one of balanced growth, optimism from younger workers and retention of contributions, contrasted with a trend of increasing withdrawals from plans,” said Lorna Sabbia, head of Retirement and Personal Wealth Solutions at Bank of America. a press release. “This year, more and more workers are understandably choosing short-term spending over long-term saving. However, it is critical that workers continue to invest in life's biggest expense: their retirement.”
While the rate of employee contributions retirement savings accounts Although interest rates remained stable at 6.5% in the first half of the year, most financial experts recommend saving 10% to 20% of your total income for retirement. One strategy is to increase your savings rate by 1% each year, in addition to adding half of any salary increase to retirement savings.
Calculate potential retirement savings based on age
With this in mind, how much could you have in savings by the time you retire if you contribute 6.5% of your salary annually? SmartAsset examined four hypothetical savers aged 25, 35, 45 and 55, all of whom contributed 6.5% of the average salary of their age category.
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Age of the saver: 25
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Median pension savings for ages 25-34: $11,357
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Average salary: $54,184
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Expected savings at age 65: $1,900,310
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Age of the saver: 35
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Median pension savings for the age group 35-44 years: $28,318
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Average salary: $63,908
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Expected savings at age 65: $1,022,366
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Age of the saver: 45
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Median pension savings for the age group 45-54 years: $48,301
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Average salary: $64,116
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Expected savings at age 65: $497,607
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Age of the saver: 55
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Median pension savings for the age group 55-64 years: $71,168
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Average salary: $61,672
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Expected savings at age 65: $230,481
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These calculations are based on data from the following sources:
As you can see, it's a wise place to start saving for retirement as early as possible, so that there is sufficient time for this compound interest to do his job. A 25-year-old who starts with the average retirement savings ($11,357) for people ages 25 to 34 could retire with more than $1.9 million by simply saving 6.5% of their salary over their entire career. But a savings rate of 6.5% is not nearly as attainable for a 45-year-old, who would have less than $500,000 at retirement age. The savings rate is even less effective for a 55-year-old, who would retire with just $230,000.
Outlook for pension savers
It's not surprising that younger workers who start saving early in adulthood can build significant savings, thanks to the effects of compounding income over time. In fact, financial planners emphasize that earlier savings can help investors overcome financial setbacks later in life, because of the compounding effects over time.
Another point to note is that employees who are automatically enrolled in an employer's 401(k) program should make the effort to review their investment options and increase their savings rate. Most auto-enrollment plans start at 3% of profits or less and typically invest the money in low-earning, ultra-safe investments that are unlikely to produce significant income over time. You may also want to make sure you take advantage of this 401(k) matching your employer offers.
In short
Too many Americans are entering retirement without being adequately prepared to support themselves for 30 years after leaving work. By exploring your options and getting a handle on your finances, savings and investments, you are more likely to be ready for retirement. A recent Bank of America study and SmartAsset calculations show how important it is to start your retirement savings as early as possible.
Tips for retirement savings
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One way to get help planning your retirement is by working with a financial advisor. Finding a financial advisor does not have to be difficult. SmartAsset's free tool connects you with up to three vetted financial advisors serving your area, and you can have free introductory calls with your advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.
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Take a look at SmartAsset 401(k) calculator to find out how your income, employer matches, taxes and other factors affect how your 401(k) grows over time.
Photo credits: ©iStock.com/Cn0ra, ©iStock.com/LaylaBird
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