Americans set aside an all-time high portion of their paycheck in their 401(k) accounts last year, according to Vanguard’s “How America Saves 2025” report.
On average, Americans saved 7.7% of their paycheck in their employer-provided retirement plan last year — a record high — and nearly half of participants juiced up their savings rate, up from 39% who did so in 2022.
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When you kick in employer contributions, the average total participant contribution rate was 12%, up from 11.3% four years ago, per Vanguard. “That’s a very good thing because what flows from that are positive retirement outcomes,” David Stinnett, head of strategic retirement consulting at Vanguard, told Yahoo Finance.
“We recommend saving 12%-15% of your income for retirement,” he added. “This year’s total average savings rate puts workers in that range.”
Vanguard’s annual report unpacks the retirement savings behaviors of nearly 5 million American workers.
The big news: The impact of target-date retirement funds on savings. But the report wasn’t a complete knock ’em out of the park for savers due to a small but notable portion of participants turning to hardship withdrawals.
The driving force behind the rise in contributions and worker participation in retirement plans is tied to more employers automatically enrolling new employees in their retirement plans with no waiting period. More than 6 in 10 plans now do so, typically earmarking those contributions to a target-date retirement fund. (Workers can opt out if they choose.)
Good news on the retirement front from Vanguard. (Getty Creative) ·Yevgen Romanenko via Getty Images
That’s roughly double the number of plans that did so a decade ago. Even better, nearly two-thirds of employer plans in this year’s report set the default savings rate, or the percentage of a new contributor’s paycheck shifted into the employer retirement plan, at 4% or higher. Roughly 30% of plans are setting defaults at 6% or higher — nearly double the proportion of plans choosing 6% or more in 2015.
Again, workers can tweak that amount as they see fit. But for most people, inertia kicks in and they let it be.
“Automatic enrollment in 401(k) plans helps workers overcome many of the common barriers to saving for retirement — lack of planning skills, difficulty with complex financial decisions, or procrastination,” Jeff Clark, head of defined contribution research at Vanguard, told Yahoo Finance.
Among auto-enrollment plans, around 7 in 10 of Vanguard’s plan participants have their contribution level automatically bumped up annually by their employer, usually by 1% to 2%, not so subtly pushing people to save more each year.
Hot Roth: Tax planning for retirement seems to be gaining steam with many workers. Eighteen percent of participants make their contributions to their 401(k) plan in a Roth option — a new high, per the data. Workers pay taxes on the amount pulled from their paycheck, but once the money is invested in the Roth, it grows tax-free and can be withdrawn tax-free in retirement.
On target: Now back to those target-date funds. Americans love these funds. I do too. Target-date fund assets soared to a record $4 trillion in 2024, according to Morningstar’s recent “Target-Date Fund Landscape” report.
At Vanguard, last year more than 8 in 10 participants in its 401(k) accounts used target-date funds. About two-thirds of all 2024 contributions went into these funds — more than ever before. Roughly 7 in 10 target-date investors, in fact, had their entire account invested in a single target-date fund. That’s up from 6 in 10 in 2022 and more than double those who did so in 2013.
Target-date strategies are a “set it and forget it” way to invest savings based on a “retirement” year you pick — say, when you turn 67, the full retirement age for most of us. The fund shifts an account’s investments, typically made up of index funds, from stocks to more fixed income and less volatile choices, such as cash and bonds, as you age.
Participants who are pure target-date fund investors not only benefit from continuous rebalancing and more age-appropriate investments in equities but also are far less likely to trade when compared with all other investors, according to Vanguard’s research.
Clark said this has also influenced extreme portfolio allocations. The percentage of 401(k) investors with no allocation to equities has fallen to an all-time low, and the percentage of participants investing exclusively in equities has also fallen significantly, according to the research.
About one-half of participants ages 25 to 34 were invested in a 2060 target-date fund in 2024, which is composed of more than 90% equity index funds and the remainder in bond index funds. Half of participants ages 55 to 64 were invested in a 2030 target-date fund with 61.8% equity index funds and the balance in bond index funds.
Retirement raids: One blip. While the bulk of Vanguard plan participants are piling up their account balances, an increasing number of people are pulling funds out through hardship withdrawals — 4.8% of participants tapped a hardship withdrawal, up from 3.6% in 2023, scoring another largest ever figure.
Aside from dwindling retirement savings, they paid income tax on any previously untaxed money and an additional 10% tax if they were not at least 59 1/2. There are a few exceptions to the tax penalty. These include certain medical expenses, qualified tuition payments, and up to $10,000 for first-time homebuyers.
In 2024, more than a third (35%) of hardship withdrawals were used to avoid a home foreclosure or eviction. The second most common reason was medical expenses, followed by withdrawals used for home repair.
“The modest increase in hardship withdrawals indicates a need for financial wellness and emergency savings resources for workers,” Clark said.
