Vanguard Releases New Report: 3 Retirement Trends You Can't Afford to Ignore

Key Points

Saving for retirement can seem daunting, especially if you are young and starting from scratch, or older and realize that you might not be saving nearly enough. After all, increasing a nest egg to more than $1 million is no small task, but it is what most Americans think they need to retire comfortably. According to a study by Northwestern Mutual, the average amount Americans say they need is $1.26 million.

Some advisors recommend the 4% rule. This plan allows the retiree to withdraw 4% of their savings each year, adjusted for inflation. Using this calculation, $1.25 million would provide $50,000 a year for 25 years. Whether this is enough depends on lifestyle and location.

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No matter what the situation is, the most crucial step is to get started — the sooner, the better. Vanguard recently released a report titled “How America Saves 2025,” which uses data from its accounts to identify key trends from 2020 to 2024. Please note that the data from its accounts may not accurately represent the broader retirement market.

Participation is up

The first trend is that plans are using new rules to encourage participation, and it’s working.

The Secure 2.0 Act, established by Congress and signed into law in 2022, requires all new 401(k) and 403(b) plans to enroll employees automatically at a minimum salary deferral of 3%. Employees can opt out, but most do not. A different Vanguard study shows that participation skyrockets to 91% compared to just 28% with voluntary enrollment. And, as shown below, the number of automatic enrollment plans has skyrocketed.

Image source: Vanguard.

This is terrific news, and it is compounded by many plans offering automatic deferral increases. For instance, a participant could choose to increase their savings rate by 1% per year, up to a specified maximum deferral. In 2024, 29% of participants increased their contributions this way compared to 25% in 2020.

Still, 45% did not raise their rates in 2024, and 10% either lowered their deferrals or stopped altogether. This illustrates the challenges of balancing living costs with retirement savings. Unfortunately, these individuals haven’t participated in a market where stocks have continued to reach record highs. Speaking of record highs, the average account balances in the Vanguard report have grown from $95,000 to $148,000 during the past 10 years.

What’s your target date?

Another trend shows that participants are flocking to target-date funds.

Let’s face it, we aren’t all financial experts, let alone experts on the holdings of various mutual funds and exchange-traded funds (ETFs) offered by retirement plans. This can be dangerous in two ways. Someone young may unknowingly be far too conservative and miss out on gains that have a huge impact over time. On the other hand, those nearing retirement can be far too aggressive, putting their upcoming retirement at risk. Enter target-date funds.

Target-date funds enable participants to select a date that aligns with their retirement goal. Professional managers will automatically adjust the fund holdings over time to the proper level of risk. According to Vanguard’s report, 96% of plans offer target-date funds, and 84% of participants take advantage of them (compared to 90% and 69%, respectively, in 2015). There is no guarantee that these funds will outperform others; however, risk management by professionals is an excellent option for most investors.

Roth participation lags

The final trend is participants are slow to adopt Roth options, and this could be a mistake for many.

Another thing that Secure 2.0 did was increase the accessibility of Roth retirement plans by letting employees choose to receive employer matching contributions after tax and expanding the availability to additional plan types. The primary difference between traditional plans and Roth plans lies in their tax treatment. Traditional plans are not taxed until the funds are withdrawn. In contrast, Roth contributions are taxed before they are invested and then can be withdrawn tax-free (subject to specific rules).

There are several advantages to Roth plans. The participant isn’t required to make required minimum withdrawals (RMDs) during retirement, allowing the funds to grow for as long as they want, without being subject to the taxes associated with RMDs. Qualified participants can also withdraw their contributions at any time without incurring tax or penalty. This is great for emergencies and helps avoid penalties that may be incurred when withdrawing funds prematurely from traditional plans. Of course, this is a simplified version, so be sure to consult a tax professional.

Roth is an excellent option, but few take advantage of them when offered. Vanguard reports that 86% of plans offer a Roth option, but only 18% of participants take advantage of it. If your plan offers a Roth option, it’s worth exploring.

Saving for retirement is one of the most important tasks Americans undertake, and evidence from the study suggests that recent policy changes are having a positive impact. Automatic enrollment and contribution increases are working, pushing the average savings rate as a share of earnings to a record 7.7% in 2024. There are also more options than ever, and it’s easy to choose a target-date fund and let the pros handle the heavy lifting. As mentioned above, the best thing to do for a comfortable retirement, if you haven’t already done so, is to get invested.

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