American workers participating in 401(k) plans in 2023 continued to save at unprecedented rates, Vanguard’s annual report, “How America Saves,” reveals.
While the overall trends in savings and investment were positive, there were signs of financial strain among some participants. The report notes a 12% increase in loan usage from 2022. More concerning was the rise in hardship withdrawals. Nearly 4% of non-retirees took money out in 2023 for emergencies.
Despite strong savings habits, some workers face financial challenges that necessitate tapping into their retirement funds prematurely.
Record high account balances
In 2023, average 401(k) account balances rose 19%, mainly due to market performance. By the end of the year, the average participant account balance was $134,128. The median account balance reached $35,286 – 29% more than the end of 2022.
The stock markets saw gains of 25%, while bond markets rose 5% on the back of strong economic growth, resulting in high 401(k) balances.
Additionally, the average participant deferral rate matched the historic high of 7.4%. With employer contributions factored in, the total savings rate maintained its 11.7% all-time high from the previous year.
The increase in automatic enrollment drives these savings behaviors. In 2023, a record 59% of 401(k) plans included automatic enrollment, up from 35% a decade ago. Among these plans, 60% defaulted employees at a deferral rate of 4% or higher, another all-time high.
The shift in plan design led more participants to increase savings rates; 43% of participants raised their deferral rates in 2023, Vanguard’s highest reported level.
Long-term investment behaviors
Despite economic uncertainties and market volatility in 2023, American workers largely remained committed to long-term retirement goals. The use of target-date funds, often many plans’ default investment option, continued to rise.
These funds accounted for 64% of all contributions, growing in popularity. Only 1% of investors who exclusively invest in a single target-date fund made trades in 2023, highlighting strong adherence to long-term investment strategies.
Account advice availability also reached new heights. More than three-quarters of participants access professional financial advice. A record number of participants took advantage of this service in 2023, reflecting increased reliance on professional guidance to navigate complex financial landscapes.
Growing concerns
Despite optimistic retirement savings behavior, the broader economic environment presented challenges, including the highest mortgage rates in more than two decades and record-high household debt.
Participants using hardship withdrawal jumped to a record high of 3.6%. Of consumers’ hardship withdrawals last year, 39% were to prevent home foreclosure or eviction – 31% more than just two years earlier. Medical expenses were a close second, accounting for one-third of hardship withdrawals, consistent with 2022 levels.
Data from Fidelity notes similar hardship withdrawal trends. In Q3 2023, 2.8% of participants took out 401(k) loans due to inflation and rising living costs. Americans who identify inflation or high living costs as their family’s top financial problem peaked for the third consecutive year – this year, 41% cite the issue, an increase from 35% last year.
Gallup’s annual Economy and Personal Finance poll, conducted in April, reports the latest findings. Gallup has asked Americans to name their top financial concern annually since 2005. Inflation has been the leading worry for the past three years.
This year, the cost of owning or renting a home follows inflation as the second-most pressing issue at 14%, a new high for this category.
Americans’ other major concerns include excessive debt (8%), health care expenses (7%), low wages or lack of funds (7%), and energy costs or gas prices (6%).
High homeownership and rental costs continue to crush average Americans. Zillow’s recent research report sheds light on the reality homebuyers face and significant market shifts since 2020. To afford a home in the current market, individuals need to earn $47,000 more than they did just a few years ago, pushing the required annual income to over $106,000.
Redfin’s recent research, which delved into housing and income statistics, mirrors these findings, highlighting the widening gap between home affordability and average earnings. Their analysis reveals that the average household’s income falls short by about $30,000 of what is necessary to purchase a median-priced home in the U.S.
To afford such a home today, a buyer must earn $114,000 annually – 35% more than the typical household earns.
Positive outlook amid struggles
Despite the uptick in hardship withdrawals, the general outlook for retirement savings remained positive. Fidelity Investments reported retirement savers ended the year on a high note, with improved market conditions and steady contributions boosting average account balances to their highest level in nearly two years.
Additionally, more than one-third (37%) of workers increased retirement savings contributions in 2023, indicating a commitment to preparing for the future.
While American workers achieve record savings rates and show resilience in their retirement planning, increasing hardship withdrawals and loan usage highlight some participants’ ongoing financial challenges. The continued evolution of retirement plan designs and growing financial advice accessibility are crucial in helping Americans achieve long-term financial security.
This article was produced by Media Decision and syndicated by Wealth of Geeks.