The good news for retirement savers who use 401(k) plans and similar workplace retirement accounts is that the improving stock market is leading to an increase in account balances. According to a Bank of America report, the average 401(k) has increased by an average of $7,250 since the end of 2022 – an increase of 9.6%.
The report also found 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). Speak to a financial advisor today.
Increasing account balances vs. more hardship withdrawals
While account balances have increased, the number of workers taking hardship withdrawals from 401(k)s increased 36% compared to the second quarter of 2022. This comes as Americans continue to face rising interest rates and housing and food costs, which have risen steadily as a result of recent inflation.
“The data from our report tells two stories – one about balance growth, optimism among younger employees and retention of contributions, versus a trend of increasing withdrawals from plans,” said Lorna Sabbia, head of retirement and personal wealth solutions at from Bank of America a press release. “This year, more employees are understandably prioritizing short-term spending over long-term savings. However, it is vital that employees continue to invest in life’s biggest expense – retirement.”
While the share of employee contributions to retirement accounts remained steady 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, plus add half of each raise to your retirement savings.
Calculating potential retirement savings by age
With this in mind, the question is, if you contributed 6.5% of your salary each year, how much savings could you have by retirement? SmartAsset studied four hypothetical savers aged 25, 35, 45 and 55, all of whom contributed 6.5% of the average salary for their age group.
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Age of saver: 25
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Average retirement provision between the ages of 25 and 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 saver: 35
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Average retirement provision between the ages of 35 and 44: $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 saver: 45
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Average retirement provision between the ages of 45 and 54: $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 saver: 55
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Average retirement provision between the ages of 55 and 64: $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, you should start saving for retirement as early as possible so that compound interest has enough time to take effect. A 25-year-old starting with the average retirement savings ($11,357) for people ages 25 to 34 could retire with over $1.9 million by simply saving $6 over the course of their career .5% of his salary saved. But a 6.5% savings rate isn’t nearly as profitable for a 45-year-old, who would have less than $500,000 in retirement. 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 no surprise that younger workers who start saving early in adulthood are able to build up a sizable nest egg over time thanks to the impact of compounded income. In fact, financial planners emphasize that early savings can help investors overcome financial setbacks later in life because the effects compound 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 evaluate their investment options and ensure they increase their savings rate. Most auto-enrollment plans start at 3% of income or less and typically invest the money in low-earning, extremely safe investments that are unlikely to provide significant returns over time. You may also want to make sure you’re taking advantage of any 401(k) offerings that match your employer.
Bottom line
Too many Americans face retirement without being adequately prepared to support themselves for up to 30 years after leaving the workforce. As you consider your options and get a handle on your finances, savings and investments, you are more likely to be ready for retirement. A recent study by Bank of America and SmartAsset calculations make it clear how important it is to start planning for retirement as early as possible.
Tips for saving for retirement
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One way to get help planning for retirement is to work with a financial advisor. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors working in your region, and you can have free introductory meetings with your matching 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, get started now.
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Check out SmartAsset’s 401(k) calculator to find out how your income, employer contributions, taxes and other factors affect how your 401(k) grows over time.
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