Periodically increasing the amount you set aside for retirement can help improve your chances of having enough retirement income later in life. Vanguard recently released data analyzing whether retirement plan participants are saving enough to replace their income in retirement. The researchers found that a modest increase in participants’ elective deferral rates would allow 7 out of 10 plan participants to achieve a 75% target replacement rate in retirement. Here’s what savers should know.
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What does Vanguard’s data say?
In Recently published research by VanguardThe company analyzed approximately 1.9 million eligible employees and 1.5 million active retirement plan participants in an estimated 880 plans through December 2020.
Research shows that 7 in 10 defined contribution plan participants are saving at a level that allows them to achieve a 65% income replacement rate in retirement. Data factors in both employee elective contributions and employer contributions.
Crucially, according to Vanguard, increasing the elective deferral rate by 1 to 3 percentage points would allow 7 in 10 plan participants to achieve a 75% replacement rate in retirement.
The report says plan design makes a significant contribution to savers’ success. The survey notes: “Higher automatic enrollment defaults and generous employer contributions, in the form of appropriate incentive contributions and/or other inappropriate employer contributions , which increases the likelihood that participants will save efficiency”.
What is the 75% target replacement rate?
The 75% target replacement rate is the portion of pre-retirement income that some experts recommend replacing in retirement to fully fund your lifestyle.
For example, a $50,000 annual salary at 75% replacement would translate to $37,500 per year in retirement.
For workers who are decades away from retirement, Vanguard says, the 75% benchmark has proved particularly useful in providing a way to predict consumption habits during their golden years. And while a 65% replacement rate is a solid start, 75% is more in line with what many experts recommend.
“Target replacement rates are very helpful in establishing target savings rates,” says Vanguard. Knowing your target savings rate can help you understand how much to save in retirement each year.
What Retirement Savers Should Know
If you want to continue saving for retirement, there are ways to do so. One helpful solution is to check if your employer offers an automatic 401(k) savings increase (ASI).
The 401(k) ASI feature automatically increases employee contributions. For example, it can be set to increase the employee’s contribution percentage by 1% of the employee’s pre-tax salary each year up to a maximum of 15%.
However, if an employee chooses not to use the 401(k) ASI, they can always manually increase the total contribution each year.
Bonuses are another opportunity to save. You can add bonuses to your 401(k) contributions each year.
Note, however, that the 2022 401(k) contribution limit is $20,500 for those under age 50. If you’re 50 or older, you can contribute up to $27,000 by 2022.
bottom line
It’s never too late to start saving for retirement. Increasing your savings now, or designing your contributions to grow one percentage point each year, are ways to increase the likelihood that you can replace 75% of your income in retirement.
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