Periodically increasing the amount you put toward retirement can help improve the chances that you’ll have enough retirement income later in life. Vanguard recently released data that analyzes whether retirement plan participants are saving enough to replace their income in retirement. Researchers found that a modest increase in participant elective deferral rates would enable 7 in 10 plan participants to attain a 75% target replacement rate in retirement. Here’s what savers should know.
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What Does Vanguard’s Data Say?
In Vanguard’s recently published research, the firm analyzes approximately 1.9 million eligible employees and 1.5 million active retirement plan participants in an estimated 880 plans through December 2020.
The research found that 7 in 10 defined contribution plan participants are saving at rates that would enable them to reach a 65% income replacement rate in retirement. The data factors in both employee elective contributions and employer contributions.
Importantly, according to Vanguard, elective deferral rate increases of 1 to 3 percentage points would enable 7 in 10 plan participants to attain a 75% replacement rate in retirement.
Plan design contributes significantly to savers’ success, the report says. “Higher automatic enrollment defaults and generous employer contributions, in the form of incentive matching contributions and/or other nonmatching employer contributions, increase the probability that participants will save effectively,” the survey notes.
What Is the 75% Target Replacement Rate?
The 75% target replacement rate is the portion of pre-retirement income some experts suggest you replace in retirement to fully fund your lifestyle.
For example, a $50,000 annual salary at a 75% replacement rate would translate to $37,500 per year in retirement.
For workers who are decades away from retirement, Vanguard says, the 75% benchmark proves particularly useful in providing a way to predict consumption habits in 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 ratios are useful in setting target saving rates,” Vanguard says. Knowing your target saving rate can help you understand how much to squirrel away in a retirement fund each year.
What Retirement Savers Should Know
If you want to stay on track to save for retirement, there a multiple ways to do so. One helpful solution is to check whether your employer offers a 401(k) automatic savings increase (ASI).
The 401(k) ASI feature automatically increases an employee’s contribution amount. As an example, it can be set to increase an employee’s contribution percentage by 1% of the employee’s pre-tax salary each year up to a maximum of 15%.
If an employee elects not to use the 401(k) ASI, however, he or she can always increase contribution totals manually each year.
Bonuses are another opportunity to save. You can add your bonuses to your 401(k) contribution amount each year.
Keep in mind, though, that the 401(k) contribution limit in 2022 is $20,500 for those under age 50. If you are 50 years old and over, you can contribute up to $27,000 in 2022.
Bottom Line
It’s never too late to start saving for retirement. Increasing your savings now, or designing your contributions to increase by a percentage point each year, are ways to boost the odds that you’ll be able to replace 75% of your income in retirement.
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Source: https://finance.yahoo.com/news/vanguard-says-modest-change-helps-153853386.html