American Workers Face a Retirement Savings Reality Check — What Advisors and Investors Must Do Now
Recent data from Schroders reveals a sobering truth: American workers participating in retirement plans expect to need an average of $1.28 million to retire comfortably. Yet only 30% believe they will have $1 million or more saved by retirement. Nearly half anticipate less than $500,000, with a quarter expecting under $250,000. This gap between expectations and reality is echoed by the Transamerica Center for Retirement Studies, which found that 68% of workers feel they could work until retirement age and still not have enough saved.
This widespread shortfall is more than just a number — it signals deep financial insecurity among future retirees, including a pervasive fear of outliving their savings. As inflation and living costs rise, many workers prioritize immediate expenses over long-term financial health, a behavior Deb Boyden, head of U.S. defined contribution at Schroders, calls “here and now thinking.” This mindset, while understandable, jeopardizes retirement readiness.
The Critical Metric: Savings Rate Over Savings Goal
While headlines often focus on the total nest egg needed, savvy investors and advisors know the savings rate — the percentage of income saved and contributed to retirement plans — is the true lever for success. According to Vanguard’s 2024 report, the average employer match stands at 4.6% of pay, and experts recommend contributing at least enough to capture this free money. But to reach retirement goals, a total savings rate (employee plus employer) between 12% and 15% is ideal. Currently, the average 401(k) savings rate is at the low end of this range, around 12%.
Here’s the kicker: increasing your savings rate by just 1-2% annually can drastically improve your retirement outlook. For example, a 35-year-old earning $75,000 who boosts contributions from 10% to 15% could add hundreds of thousands of dollars to their final balance by retirement, thanks to compounding growth.
Resist the 401(k) Loan Temptation
Nearly 17% of retirement savers admit to borrowing from their 401(k) plans, often to cover emergencies, debt, or rising living costs. While 401(k) loans avoid immediate taxes and penalties, they come with hidden costs: lost investment gains and the risk of rapid repayment if employment ends. Advisors should encourage clients to build dedicated emergency funds outside retirement accounts to avoid these costly loans. Establishing even three to six months of living expenses in a liquid savings account can be a game changer.
Don’t Let Cash Drag Your Portfolio Down
Surprisingly, 31% of investors don’t know how their retirement funds are invested. Of those who do, equities lead at 31%, but cash allocations are a close second at 23%. While higher interest rates have made cash returns more attractive, holding too much cash can erode purchasing power over time, especially for long-term investors.
For those with decades until retirement, increasing exposure to equities and diversified growth assets is essential. Target-date funds, which adjust risk based on retirement timelines, offer a smart, hands-off approach. Advisors should encourage quarterly portfolio reviews to realign allocations with evolving goals and market conditions.
What’s Next? Actionable Steps for Advisors and Investors
- Prioritize Savings Rate Increases: Encourage clients to gradually increase their contributions to at least 12-15% of income, taking full advantage of employer matches.
- Build Emergency Savings: Help clients establish separate emergency funds to reduce reliance on retirement plan loans.
- Educate on Investment Allocations: Regularly review and adjust portfolios, emphasizing growth assets for long-term horizons while balancing risk tolerance.
- Leverage Technology: Use financial planning tools to model different savings and investment scenarios, illustrating the impact of small changes.
- Stay Informed on Policy Changes: Keep abreast of legislative updates affecting retirement plans, such as changes in contribution limits or tax incentives, to optimize strategies.
A Unique Insight: The “Revenge Savings” Phenomenon
A recent study from CNBC highlights a growing trend called “revenge savings,” where consumers, after pandemic-related spending freezes, are now aggressively saving to regain financial control. This behavioral shift presents a timely opportunity for advisors to tap into clients’ renewed motivation and channel it into disciplined retirement saving.
Final Thought
The retirement savings gap is real, but it’s not insurmountable. By focusing on actionable behaviors — boosting savings rates, avoiding costly 401(k) loans, and maintaining appropriate investment allocations — investors can significantly improve their retirement outlook. Advisors who proactively guide clients through these steps will not only help secure their financial futures but also build lasting trust in an increasingly complex landscape.
Sources: Schroders Retirement Survey 2024, Vanguard Defined Contribution Plan Report 2024, Transamerica Center for Retirement Studies, CNBC “Revenge Savings” Report 2024.
Source: Just 30% of workers expect to save $1 million for retirement: survey