Here’s the Average Retirement Savings Rate Today. You Need to Do Better.

There are many people who end up retiring without so much as a dollar saved. But hopefully, that’s not your plan.

In fact, ideally, you’re already saving money for retirement on a consistent basis. That could mean participating in an employer’s 401(k) plan, funding an IRA on your own, or both.

But are you saving enough of your income for retirement? If your contribution rate is similar to that of a typical 401(k) plan participant, you may not be.

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The average 401(k) contribution rate in 2023 was 7.4%, according to recent data from Vanguard. But while saving 7.4% of your pay is far better than saving nothing, that contribution rate may not take you as far as you need to go.

It pays to aim higher

Saving 7.4% of your pay may be something that takes effort to do. Saving beyond that point might seem like a stretch.

But you should know that these days, financial experts generally recommend setting aside 15% to 20% of your income for retirement savings purposes. If you’re stuck at 7.4%, you’re barely allocating half of the lower end of that range to your IRA or 401(k) plan.

A big reason there’s so much pressure to save more for retirement today has to do with Social Security. In case you haven’t heard, Social Security is at serious risk of having to cut benefits in about a decade’s time if lawmakers don’t manage to find a way to address the program’s pending financial shortfall.

As it is, Social Security will only replace about 40% of your wages if you earn an average salary. If benefit cuts happen, that percentage will only shrink, leaving you even more reliant on whatever nest egg you manage to bring with you into retirement.

That’s why it’s important to aim for a 15% savings rate at a minimum. You may not be able to go from a lower contribution rate to 15% overnight, and that’s understandable.

But in the coming months, start cutting back on expenses or seeing what other options you have to free up money for your nest egg. And also, make absolutely sure you’re snagging your full employer 401(k) match, if you’re eligible for one. If your employer will match 100% of up to 3% of your salary, you only have to set aside 12% of your pay yourself to get to the 15% mark.

Another good way to increase your retirement plan contribution rate? Each year you get a raise, send that money into retirement savings automatically. If you do so before you get a chance to start spending it, it’s money you shouldn’t end up missing.

You may need to spread your savings across multiple accounts

It’s important to make sure you’re saving enough for your future years. And unfortunately, banking 7.4% of your pay may not cut it. So start making changes to slowly but surely inch your way closer to saving 15% of your income.

That said, you may need to get creative if you don’t have access to a 401(k) plan and 15% of your income exceeds the allowable contribution limit for an IRA (currently $7,000 for savers under 50 or $8,000 for those 50 and older). If you earn a $60,000 annual salary, which is in line with the median wage today, saving 15% of that income means contributing $9,000, which means you can’t fall back on an IRA alone.

In that case, you can always save some of your money in a taxable brokerage account. Or, if you’re eligible, you can save the remainder in an HSA and hang onto that balance until retirement arrives.

HSAs normally incur penalties for non-medical withdrawals, but those go away starting at age 65. So there’s no reason an HSA can’t double as a retirement savings plan if you need another tax-advantaged home for your money.