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In the news, I read how Social Security will dissolve in the future as it will inevitably run out of money. The experts advise not to depend on Social Security as we get older.
As many of you know, I continually preach about the importance of saving for the future. That is why I was curious to see how people were saving money in their 401(k) accounts, since they may not be able to depend on Social Security.
How America Saves
Vanguard recently published the “How America Saves 2017” report, which found that contribution rates into defined contribution plans vary greatly, depending on age and income of the participant.
In the study, Vanguard found that its participants in 2016 had an average account balance of $96,495, which is a slight increase compared to $96,288 in 2015. However, the median balance dropped from $26,405 to $24,713 between 2015 and 2016.
Average vs. Median
The average balance and median balance can greatly differ. The median account balance simply represents the midpoint of the data for participants. This means that in 2016, 50% of participants had greater than $24,713, while 50% had less. On the other hand, the average account balance is the midpoint of the average account size.
The median centers around the people, whereas the dollar size dictates the average.
In 2016, the average worker set aside 6.2% of their earnings into their accounts. In 2015, the average deferral rate was 6.9%. On top of that, in 2016, the median deferral rate was 5%, compared to 6% in 2015.
With news that the economy is improving, I was unsure as to why the average deferral rate had dropped. After digging deeper, there was a silver lining. Because there has been an increase in automatic enrollment plans, there has also been an increase in participation rates. That, in combination with lower default deferral rates, often times 3% or less, pushed down the average deferral rate.
Even though the percentages dropped, the number of participants actually increased. The number of participants enrolled in automatic plans increased from 79% to 81% between 2015 to 2016. Even more astounding, 90% of automatic enrollees continued to participate, instead of opting out, which is impressive to me.
Voluntary vs. Automatic Enrollment
Looking at the above figures, I was astounded at the large difference between voluntary and automatic enrollments. There is almost a 60% difference for those under 25. Clearly, the younger crowd doesn’t make it a priority to invest in the future unless they must opt out.
Voluntary enrollment steadily increases as people get older. However, based on these studies, it appears that all companies should automatically enroll their participants, since the figures show at least 85% stayed enrolled.
In addition to the increase in automatic enrollment plans, something else is at play. As the economy revs up, people leave their companies for new opportunities. That means, often times, that people have multiple 401(k) accounts. This is because most people do not roll over their old accounts into their new ones. Thus, the smaller balances in the new 401(k) accounts could suggest that people may have more money in other savings accounts.
Saving for the Future
It does appear that some of these balances are low, especially in the 25-34 age group, $22,256. But, if you consider these planned participants invested in the S&P 500, which has a historical average of 8%, this means that they should have more than $221,000 in 30 years. That doesn’t even include the 6.2% average that they contribute from their paycheck.
The average US income is $56,516. If you use the deferral rate of 6.2%, $3,503 would be invested every year. If an individual never got another raise, they would end up with over $618,000 in 30 years. Based on the Trinity Study, this should allow them to spend $24,700 per year.