Vanguard just released their annual report on the state of retirement savings in America: How America Saves 2018
There’s a ton of great info in the report, but we want to highlight some good news…and some bad news.
First, let’s start with the positives:
Participation rates: More people are enrolled in defined-contribution plans;
Portfolio composition: This has improved, as plans have moved away from random fund selection and toward either target-date funds or balanced funds;
Automatic enrollment: Up 300 percent since 2003;
Automatic annual deferral-rate increases: Two-thirds of participants do this;
Account balances: Most have increased substantially.
And, now the bad news:
Total savings: It’s still not enough, and it suggests a large swath of the public either doesn’t save enough or can’t save. You can blame some of it on lack of wage gains during the past few decades. The huge increase in the cost of health care, housing and education certainly doesn’t help. Nor does our profligate, consumption-driven lifestyle. But no matter the reason, the conclusion is inescapable: many Americans are not financially prepared to retire. Perhaps that’s why so many of them are working well into their 80s.
More nudges are needed: Savings for many people are not keeping pace with their pay increases. There is a tendency to set and forget 401(k) contributions, and not revisit the issue ever again. The solution is to have automatic increases for retirement-savings contributions as pay increases.
Target-date funds: These funds automatically adjust the balance of stocks and bonds over time, shifting more heavily toward bonds as the participant gets closer to retirement. The problem is that given increasing modern lifespans, these funds may end up being too conservative in the final decade or two of work for many participants.
To have and to have not: To paraphrase Hemingway, the rich are different: they not only have more money, they also have more retirement savings. The advantages of being wealthy are manifest versus middle- and lower-income savers. Although most of the investment industry targets the wealthy, the underfunded retirement plans of the rest of America continue to be a serious issue.
Spend some time reading through Vanguard’s report to not only help you get the best from your retirement-savings plan, but also help America do better with its future retirement.