Though the pandemic made it hard for some Americans to just get by, it gave many others the ability to save even more for their futures. Buoyed by a high national savings rate and a well-performing (if initially volatile) stock market, the average 401(k) account balance increased from $74,000 in 2019 to $81,000 in 2020, Bank of America's Financial Life Benefits Impact Report reveals.
The report examined the saving and investing habits of the more than 3 million workers participating in a workplace 401(k) plan offered by the company.
"Maintaining contributions to retirement, despite the uncertainty and disruption of a pandemic, and holding investment allocations steady amid the volatile markets paid off for savers last year, with average balances on the rise," says Greg McBride, chief financial analyst at Bankrate.
It's clear that many Americans understand the importance of saving for retirement, and are committed to securing a comfortable future. Nearly 60% of eligible employees participated in their workplace's BofA 401(k) plan last year. That's consistent with pre-pandemic rates in 2019.
Among the generations partaking in a BofA workplace retirement plan, one stands out: Gen Xers, people between the ages of 42 and 56, had a 64% participation rate, the highest among those analyzed.
Despite being closest to traditional retirement age, only 59% of baby boomers (ages 57 to 75) participated in their workplace's plan. So did 53% of millennials (ages 27 to 41) and 24% of the members of Gen Z (ages 9 to 26) who were old enough to work.
Video by Ian Wolsten
In general, older Americans have been able to stash away more money over the course of their careers. Gen Xers with retirement accounts have an average balance of $568,750, according to wealth management platform Personal Capital, which studied the account balances of its 2.8 million users.
Not everyone saw their 401(k) balance go up this year. Many workers had to withdraw from their retirement accounts to stay afloat, which they were able to do without penalties thanks to the $2.2 trillion CARES Act that passed last March.
"Despite the best-laid financial plans, a surge in unemployment and prolonged income disruptions from the pandemic meant many households ran out of options and reluctantly tapped their retirement accounts," McBride says. Still, BofA reports that just 10% of 401(k) participants took a hardship withdrawal. For those who did, the average amount withdrawn was less than $18,000.
If you lost a job, had your salary cut, or dug into your savings, now is the time to "focus on regaining employment, stabilizing your finances, and rebuilding your retirement account," McBride says.
Utilize tax-advantaged accounts such as a 401(k), Roth IRA, or a traditional IRA, if you aren't doing so already. While the amount you can save will ultimately depend on your individual circumstances, experts recommend aiming to set aside about 15% of your monthly income, which encompasses both your own contributions and any your employer makes on your behalf.
BofA's study found that the overall pre-tax contribution rate for employees was 6.5%, but don't worry if you can't reach that number yet. Try starting at 3% and steadily increasing your contributions as you earn more, since compound interest will help your money grow.
How you save for retirement can be nearly as important as how much you save, Mike Webb, vice president of Cammack Retirement Group in New York, recently told Grow. "If your company's retirement plan matches employee contributions, saving at least the minimum amount to receive the maximum match in that plan will ensure that you don't leave any 'free money' on the table in your attempt to accumulate retirement wealth."
Take the example of a 25-year-old earning $50,000 a year at a company with a 5% match. If she starts contributing 3% of her salary and gradually scales up to 10% as she receives raises, she would have $1.4 million by the time she's 65, according to data from J.P. Morgan. That's assuming annual wage growth of 2%, and a 5.75% annualized return on investment after fees.
"Automate retirement plan contributions through payroll deduction into your workplace-based plan, or by automatic transfer from your bank account into an IRA," McBride suggests. "Paying yourself first is vitally important to achieving your savings goals, particularly with so many competing necessities and priorities."
If you're looking to put away more money for the future, it helps to pinpoint how much you'll eventually need. Check out Grow's retirement savings calculator to get a sense of what your goal should be. Generally, the older you are, the more you should have, but you can start saving at any age.
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