The good news for retirement savers using 401(k) plans and similar workplace retirement accounts is that the improving stock market is raising account balances. The average 401(k) is up by an average of $7,250 – a gain of 9.6% – since the end of 2022, according to a Bank of America report.
The report also found that 401(k) plan participants are contributing 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 has calculated exactly where your 401(k) balance could stand based on a few different hypothetical ages.
A financial advisor can help you plan for withdrawals from a retirement account, such as a 401(k). Speak with a financial advisor today.
Rising Account Balances vs. More Hardship Withdrawals
While account balances are up, the number of workers taking hardship withdrawals from 401(k)s increased 36% over Q2 in 2022. This comes as Americans continue to face rising interest rates, as well as housing and food costs that have steadily risen amid recent inflation.
“The data from our report tells two stories – one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” Lorna Sabbia, Head of Retirement and Personal Wealth Solutions at Bank of America, said in a press release. “This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”
While the rate of employee contributions to retirement savings accounts was steady at 6.5% for the first half of the year, most financial experts advise saving 10% to 20% of your overall earnings 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.
Calculating Potential Retirement Savings by 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 each year? SmartAsset examined four hypothetical savers at ages 25, 35, 45 and 55, all contributing 6.5% of the median salary of their age bracket.
Saver’s age: 25
Median retirement savings for ages 25-34: $11,357
Median salary: $54,184
Projected savings at age 65: $1,900,310
Saver’s age: 35
Median retirement savings for ages 35-44: $28,318
Median salary: $63,908
Projected savings at age 65: $1,022,366
Saver’s age: 45
Median retirement savings for ages 45-54: $48,301
Median salary: $64,116
Projected savings at age 65: $497,607
Saver’s age: 55
Median retirement savings for ages 55-64: $71,168
Median salary: $61,672
Projected savings at age 65: $230,481
These calculations are based on data from the following sources:
As you can see, it behooves you to start saving for retirement as early as you can, in order to allow enough time for compound interest to do its work. A 25-year-old starting with the median retirement savings ($11,357) for people ages 25-34 could retire with over $1.9 million by simply saving 6.5% of their salary throughout their career. But a 6.5% savings rate isn’t nearly as viable for a 45-year-old, who would have less than $500,000 by retirement age. The savings rate is even less effective for a 55-year-old, who would retire with just $230,000.
Outlook for Retirement Savers
It’s not surprising that younger workers who start saving early in adulthood can build a sizable nest egg, thanks to the effects of compound earnings over time. In fact, financial planners stress 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 workers who’ve been automatically enrolled in an employer’s 401(k) program should make the effort to look over their investment options and be sure to increase their savings rate. Most auto-enrollment plans start at 3% of earnings or less and usually invest the money in low-earning, ultra-safe investments that likely won’t build significant earnings over time. You may also want to make sure to take advantage of any 401(k) matching your employer offers.
Bottom line
Too many Americans are facing retirement without being adequately prepared to support themselves for up to 30 years after leaving work. Reviewing your options and getting a handle on your finances, savings and investments makes it more likely you’ll be ready for retirement. A recent Bank of America study and SmartAsset’s calculations highlight how important it is to begin your retirement savings journey as early as you possibly can.
Tips for Retirement Savings
One way to get help planning for retirement is to work with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Check out SmartAsset’s 401(k) calculator to figure out how your income, employer matches, taxes and other factors will affect how your 401(k) grows over time.
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