Saving for retirement is pretty much essential. If you don’t contribute to a retirement plan during your working years, you’ll risk ending up with a financial shortfall on your hands once your career wraps up.
If you think you’ll manage just fine on Social Security alone, think again. If you earn an average wage, your Social Security checks will generally replace just 40% of your pre-retirement wages.
You may be able to cut back on spending in retirement to some degree. But taking a 60% pay cut could mean setting yourself up for disaster — hence, the need to save.
The good news is that recent data from Bank of America shows that Americans are funding their 401(k) plans nicely. As of the end of 2023, the average 401(k) plan balance was $86,280. That’s up from $75,045 at the end of 2022.
Still, you may be worried that you’re not saving enough for retirement. If that’s the case, ask yourself these questions.
1. Am I setting aside at least 10% of my income?
Many financial experts will tell you that an optimal retirement savings target is 15% to 20% of your earnings. But let’s be real — it’s hard to part ways with one-fifth of your income every month, especially if you have big expenses, like a mortgage and child care, to grapple with.
As such, saving 10% of your income for retirement may be a more reasonable — and doable — goal. But if you’re saving a lower percentage of your paycheck, you may want to make some changes to help ensure that you don’t end up in a tight financial situation once your career comes to a close.
Bank of America says that as of the fourth quarter of 2023, the average 401(k) plan contribution rate was 6.5%. That’s a mild improvement from the prior year when the average rate was 6.4%. But still, it’s a good idea to push yourself toward the 10% mark.
2. Are my 401(k) plan contributions increasing from one year to the next?
If you’ve gotten a raise consistently over the past number of years, you really should be increasing your 401(k) contributions to follow suit. If you haven’t, consider it a wake-up call.
One smart thing to do is increase your 401(k) contribution at the very start of the year, before your raise takes effect. If you allocate that extra money to retirement savings, you won’t miss it when it’s absent from your net pay. If you start seeing that extra money come in — and you get used to spending it — then saving it for retirement is only going to be that much harder.
You may have a much larger 401(k) balance than $86,280, or maybe you’re sitting on a lot less. The reality is that there’s no point in getting hung up on a single number, especially since $86,280 in retirement savings means something very different for a 26 year old than a 59 year old.
Instead, focus on your personal savings progress. Try your best to both allocate at least 10% of your income to your nest egg and increase your contribution rate from one year to the next.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.