A new report reveals increased savings in Americans' 401(k)s, but more needs to be done.

Have you checked your 401(k) lately? A recent study indicates that Americans are saving more, but it may be necessary to save even more.

Nearly five million 401(k) plan participants have been captured in a snapshot by Vanguard and Fidelity, the two largest sponsors of such plans, in their annual report, How America Saves 2024.

The stock market is performing well, and thanks to automatic enrollment plans, investors are saving more money than before.

The median 401(k) balance of a person nearing retirement (65+) is still quite low.

A significant portion of Americans' retirement funds still comes from Social Security.

Higher returns, participation rates, savings rates

What is the significance of 401(k) plans? They are the primary private retirement savings option for Americans, with over 100 million individuals covered and more than $10 trillion in assets.

Since 2019, 2023 was the best year for investors, with an average total return rate of 18.1%.

To be effective vehicles for retirement, these plans must have high participation rates and hold high levels of savings.

John James, Vanguard's Institutional Investor Group managing director, declared it a "year of progress."

Due to a change in the law, a record-high 59% of plans now offer automatic enrollment in 401(k) plans. This is a significant improvement as previously, enrollment in 401(k) plans was often below expectations because investors had to "opt-in," meaning they had to actively choose to participate. Many did not participate due to indecision or lack of knowledge. With automatic enrollment, participants are now automatically enrolled and must "opt-out" if they do not wish to participate.

Participation rates for plans with automatic enrollment were 94%, compared to 67% for voluntary enrollment plans.

The average participant deferred 7.4% of their savings, and the average total participant contribution rate, including employee and employer contributions, reached an all-time high of 11.7%.

A few other observations about Vanguard's 401(k) plan investors:

They prefer equities and target date funds, with an average plan contribution of 74% and a record-high 64% of all 2023 contributions going into target-date funds.

Vanguard observed a decline in participant trading over the past 15 years, which it attributed to increased adoption of target-date funds.

Despite gains in the market, account balances are still low

In 2023, Vanguard participants had an average account balance of $134,128, but the median balance was $35,286, meaning half of the participants had more than this amount and the other half had less.

The median retirement account balance is significantly lower than the average due to the influence of a small group of wealthy investors. Only 40% of participants had less than $20,000 in their accounts.

Distribution of account balances

• Less than $20,000     40%
• $20,000-$99,999        30%
• $100,000-$249,900  15%
• $250,000 +                  15%

Source:  Vanguard

Median balances for those near retirement are still low

An alternative way to view the issue is by considering the savings of individuals nearing retirement age, as it reflects their readiness for impending retirement.

The average account balance for investors aged 65 and above was $272,588, but their median balance was significantly lower at $88,488.

For a 65-year-old nearing retirement, $88,488 is not a significant amount of money, given that older participants typically have higher incomes and savings rates.

Although these balances do not necessarily represent a person's total lifetime savings, some individuals have multiple retirement plans due to previous employment. Most people also have other sources of retirement savings, such as Social Security. A declining number of individuals may also have a pension. Some may have money in checking accounts or possess stocks or bonds outside of a retirement account.

Regardless, the math does not look great

So let's do some retirement math.

The typical annual withdrawal rate for a 401(k) account in retirement is approximately 4%. Withdrawing 4% of $88,488 annually results in $3,539 monthly.

The average Social Security benefit in January 2023 was approximately $1,689 per month, or $20,268 per year.

Although pensions are becoming increasingly scarce, let's still include them.

The median annual pension benefit for a private pension is $9,262, which is lower than the benefits received by government employees.

Here's our yearly retirement budget:

• Personal savings $3,539
• Pension                 $9,262
• Social Security   $20,264
• Total:                   $33,065

It's possible to live on $33,000 a year, but it would only be feasible if you own your home, have low expenses, and reside in a low-cost region.

Even then, it would hardly be a robust retirement.

Only 57% of retirees have a tax-deferred retirement account like a 401(k) or IRA, and only 56% reported receiving income from a pension.

Whether a retiree feels good or bad about their retirement is largely determined by the extra income they have.

In 2023, only 52% of retirees without private income reported being financially okay, while 80% of retirees with private income said the same.

What can be done?

In order to have a more secure retirement, Americans need to save more.

Despite the statutory maximum amount of $22,500 per year ($30,000 for those age 50 or older), only 14% of participants saved the full amount. The probable explanation is that most participants felt they couldn't afford to do so.

Despite having an income over $150,000, only 53% of employees contributed the maximum allowed to their retirement plans. This suggests that more investor education is needed to encourage participants to make the most of their "free money" by maxing out their contributions.

It is risky to believe that retirees will be rescued by a continually increasing stock market, as seen in 2022 when the S&P 500 dropped 20%, which may lead to a decline in investor confidence about their financial future.