The Latest Thinking on 401(k)s

If you’re still working and it seems like it’s harder than ever to accumulate money for retirement, here’s some evidence that what you’re feeling is true.

The 85% rule

Mature Couple

Based on analysis compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College and reported in The Wall Street Journal (2/19/11), among households headed by a person age 60 to 62 the median 401(k) account balance is less than one-quarter of what is needed to maintain the household’s standard of living in retirement.

The analysis assumed that people need 85% of their working income after they retire in order to maintain their standard of living. The 85% rule is commonly used.

Goal: Contribute 15% of your salary

Interestingly, Vanguard Group, one of the biggest providers of 401(k) plans, has changed its advice on how much people should save:

  • According to the Journal, Vanguard long advised people to put 9% to 12% of their salaries – including the employer contribution – in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.
  • Now Vanguard urges people to increase their contributions up to 15% of their salaries, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.

Of course the ultimate goal would be to contribute the maximum amount allowed by the Internal Revenue Service. For 2012, contribution limits for 401(k)s will increase to $17,000, up from $16,500 in 2011, according to the IRS. Catch-up contribution limits for those ages 50 and over will remain $5,500.

While the above analysis may or may not reflect your particular scenario, it can nevertheless serve as a reminder of the importance of making regular contributions toward retirement savings. I recommend that you involve a qualified advisor in your retirement planning process.