While many Americans have long been undersaving for retirement, the tide could be starting to shift.
The average 401(k) savings rate — meaning the percentage of someone’s salary that they’re putting into their 401(k) — hit a record high of 14.2% in the first quarter of 2024, according to Fidelity. About two-thirds of that amount (9.4%) comes from employee contributions, while the rest (4.8%) comes from employers.
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This record amount is very close to Fidelity’s suggested savings rate of 15% and could be a good sign that more workers are getting on the right track toward retirement.
“A 401(k) savings rate of 14.2% as an average is excellent, especially since AARP recently released a report that one in five Americans over 50 have zero retirement savings,” said Aaliyah Kissick, director of public relations at Financial Literacy Foundation and CEO of The Financial Literacy Diaries.
Here’s a look at what you should be doing with your 401(k).
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Figuring Out the Right 401(k) Savings Rate
While there’s been good progress on 401(k) savings rates, that doesn’t mean that 14.2% — or Fidelity’s target of 15% — should necessarily be the number everyone aims for.
This savings rate “is generally a good benchmark to target, but keep in mind that everyone’s retirement circumstances are different. The amount you save depends on your retirement goals, your age, and your personal financial situation — there’s no one-size-fits-all answer,” said Gaurav Sharma, CEO and co-founder at Capitalize.
For some, a lower savings rate might be appropriate, as you might have more pressing financial priorities.
“This percentage may be too high for a person who has recently entered the workforce and would have a high marginal benefit to applying some of that money to debt or education,” Kissick said.
For example, if you have lots of high-interest credit card debt, it’s possible that paying that down outweighs what you could gain by investing within your 401(k). That doesn’t mean you should avoid retirement savings entirely — you might want to at least contribute enough to qualify for employer matches, for instance — but you don’t necessarily have to stress about getting to a 15% savings rate right away.
“If you are beginning your retirement savings journey, don’t worry too much about your contribution amount — just get started. Some of the largest retirement account balances we’ve seen came from folks who started small and then increased their contributions over time as their financial circumstances allowed. Don’t talk yourself out of getting started by thinking your contribution percentage is too small,” Sharma said.
Others, however, have a more pressing need to up their retirement savings contributions — perhaps even above 15%.
That “may not be enough for a person who has been in the workforce for 25 years and needs to catch up from not saving before,” Kissick said.
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Maxing Out Your 401(k) Contributions
For those interested in maxing out 401(k) contributions, such as to try to retire early or simply have a large financial cushion, it’s important to consider your circumstances first. The limit for 2024 is $23,000, except those ages 50+ can contribute up to $30,500. Depending on your income, that could be well above 15%.
And although saving and investing are generally considered to be positive, you don’t necessarily want to restrict yourself by putting too much into your retirement account, where tax rules make it expensive to withdraw the funds early.
“A person who has an established emergency fund, proper risk management in place to protect their income and property in the event of an emergency, and no outstanding debt would benefit the most from having a maxed out 401(k),” Kissick said.
For example, if you have comprehensive insurance coverage and large savings such as in a health savings account (HSA) for unexpected medical expenses, then it could make more sense to put extra money toward retirement.
“After the risk of debt/bankruptcy is covered, the benefits of maxing out a 401(k) increase greatly. Generally, if you are at risk of going into debt, even from a worst-case scenario, you should keep your money in a more liquid account like a savings account or normal investment portfolio,” as you typically need to wait until age 59 ½ to withdraw from your 401(k) without penalty, Kissick said.
Maxing out your 401(k) can also make sense based on your income and tax situation.
“Maxing out a 401(k) can be smart for high-income earners or those looking to reduce their taxable income through the tax-deferred benefits that a traditional 401(k) provides. Late starters and individuals with early retirement goals should consider maxing out their 401(k), but they shouldn’t contribute at a rate that causes a burden in their living expenses,” Sharma said.
Overall, it’s important to consider what works best for your situation, rather than mindlessly choosing a retirement savings target. Although 15% is the general recommendation from Fidelity and many other experts, some benefit from saving more and some benefit from saving less, at least temporarily.
Consider using a retirement calculator online to see how different retirement savings rates could affect your retirement income, and if you’re unsure how to prioritize retirement savings with other financial goals, see if you can speak with an expert. Your company or 401(k) provider, for example, might provide free resources such as a session with a financial advisor or online tools that can help you decide.
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This article originally appeared on GOBankingRates.com: 401(k) Plans Hit Record High Rates — Should This Be the Year You Max Out Contributions?
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