The new standard: More Americans are contributing 6% of their paycheck to their 401(k) — here’s how much it can boost your retirement savings

There was a time when employees would commonly contribute 2% to 3% of a paycheck toward their 401(k) retirement plan. But that standard may soon be a thing of the past. Thanks to easier access to workplace retirement plans and automatic enrollment, workers today seem to be contributing a larger portion of their paychecks to their 401(k)s. And that’s a positive thing.

A shifting landscape

A number of positive trends have emerged from Vanguard’s 2024 How America Saves report that could lead to higher retirement savings for future retirees. For one thing, workers are getting quick access to 401(k) plans through their employer. In 2023, almost 75% of Vanguard plans let workers contribute to a 401(k) immediately after getting hired. Not only that, but almost 50% of plans allowed participants to immediately vest in employer matching contributions in 2023. There’s also been a huge shift toward automatic 401(k) enrollments. For years, workers would get hired and choose whether to sign up for their companies’ retirement plans or not. As of the end of 2023, 59% of these Vanguard plans had elements related to automatic enrollment. And because larger plans were more likely than smaller plans to enroll workers automatically, almost 75% of Vanguard plan participants were part of a 401(k) program with autopilot features, however, automatic enrollment only applied to new hires. Among plans with automatic enrollment, 33% enrolled workers at a contribution rate of 3% of their salary. But 29% of plans chose a default contribution rate of 6% of salary or more — nearly double the proportion from 2014. If this trend continues, it could lead to a huge boost to workers’ nest eggs.

Boosting retirement savings

The median retirement account balance among Americans aged 64 to 74 was $200,000 as of 2022, according to the Federal Reserve’s most recent Survey of Consumer Finances. That’s not a particularly large amount of money for what could be a 20-year retirement or longer. At a withdrawal rate of 4% per year (adjusted for inflation), a popular strategy among financial experts, that’s only around $8,000 of annual retirement income from savings. That’s why it’s important for workers to save a larger percentage of their income each year. The data from Vanguard points to an uptick in 401(k) contributions, even if workers aren’t consciously putting more money into their accounts, which might help them down the line.

What can a 6% contribution rate do for you?

As of the end of 2023, the median U.S. annual wage was $59,540, per the Bureau of Labor Statistics. At a contribution rate of 6%, that’s roughly $298 per month going into a 401(k). And that doesn’t account for additional funds that come from an employee match. Saving $298 per month over 35 years could lead to a nest egg worth about $616,000, assuming an annual 8% return on investment during that time (which is a below the S&P 500’s historical average). That’s over three times the median retirement account balance among Americans 65 to 74 as of 2022, as shown above. And remember, if your 401(k) comes with a match, you might get away with building a nest egg that large on just 3% of your salary with your employer kicking in the remaining 3%. It’s not necessarily something to count on, as companies don’t always offer a dollar-for-dollar match, but it’s possible.

How much should you contribute?

There’s no one-size-fits-all approach to saving for retirement. The amount of money you contribute each month or year toward retirement should hinge on factors such as:

• Income
• Expenses and debts
• Retirement plan access

If you don’t have a 401(k), but rather, are limited to saving for retirement via an IRA, that not only leaves you with a lower annual contribution limit, but also takes an employer match off the table. That’s why it’s important to create a budget and figure out how much money you can comfortably afford to part with on a monthly basis. If it’s 2% of your paycheck, that’s better than 0%. You can also build up your savings over time by allocating any raises or windfalls toward retirement. For example, if your salary one year goes from $60,000 to $62,000 but you’re able to continue living on $60,000, you can increase your annual 401(k) contribution by $2,000, or find an IRA with an automatic transfer and allocate your raise to it. You can also talk to a financial adviser about setting a realistic savings target. They can help you not only figure out how much to contribute toward retirement each month or year, but also set you up with suitable advice on how to grow your wealth, along with the most effective withdrawal strategy when you decide to stop working.