Research Shows: 401k Participation Rates Increasing & “Pre-Retirees” Getting Younger

Retirement Plan Professionals401k participation rates during the pandemic show some surprising trends.  In 2020, 401k participation rates during the pandemic shows that the pre-retirement age skews younger.  Despite the Covid-19 pandemic, employer-sponsored retirement plans saw an increase in 401k  participation rates during 2020.  Savings rates were higher too!  In addition, retirement ages have moved earlier.  More than one-third of pre-retirees (38%) are now under age 54.

So finds a new study, Ideas for Enhancing Advice as Income Sources Evolve and Target Dates Move Younger,  from Hearts & Wallets, a research and benchmarking firm led by Laura Varas, Founder and CEO.  The research focuses on trends in consumer personal finance.  Some of the key findings from its recent survey of nearly 6,000 households include:

  • 62% of working households report someone in their household is eligible and participating in an employer-sponsored retirement plan.  This is up nine percentage points vs. the prior year.
  • The two most important reasons nationally to participate in employer-sponsored retirement plans are “to save for retirement” and “to get the company match.”
  • More generous matches increase a consumer’s overall annual household saving rate, especially at lower income levels.

Juxtaposed with the fact that more Americans seem to be working longer, Hearts & Wallets identified a group that wants to buck that trend.  An estimated 11.5 million households with breadwinners under age 55 now say they “Aspire to Retire by 55.”  There are implications for target date funds, education, and other options.  One such rule is the Rule of 55.  The Rule of 55 is an IRS guideline that allows workers to avoid paying the 10% early withdrawal penalty.  This is for 401(k) and 403(b) accounts if leaving their job during or after the calendar year they turn 55.

Adults ages 55 to 64 are commonly considered “pre-retirees.”  However, according to Hearts & Wallets, although this demographic comprises the largest percentage of pre-retirees of all age groups, just 24% consider themselves pre-retirees.  32% of those ages 55 to 64 don’t plan on stopping full-time work within five years.  Also, 44% are already retired. An increasing number of younger adults consider themselves retirees.  401k participation rates during 2020 shot up.  More people (39%) said they planned to retire before age 65.  This reflects more than in any other year since 2010.  And 18% of those said they anticipate retiring by age 59!

“Aspire to Retire by 55” households are well-positioned to achieve their early retirement goal, however, they may need some help.  These households are more likely to use various investment products.  The group also maintains lower student-debt, less-spent on housing, and are more open to personal financial advice.  Just 1 in 5 (18%) Aspire to Retire by 55 is saving 15%-plus of their income.  That rate is recommended by most financial experts to retire successfully and on time. But their savings rate combined with other financial behaviors, such as carrying credit card debt, suggest difficulties.  An early retirement goal may be unrealistic without some behavioral change.

One reason why many pre-retirees may feel so optimistic about early retirement is they anticipate multiple streams of income.  Much more than current retirees.  According to Hearts & Wallets, nearly half of future retirees anticipate four-plus sources of income.  Wealthier future retirees anticipate having even more sources.  The average retiree household has 2.4 sources of income.  In addition, the more income sources pre-retirees anticipate having, the more value they see in paying for financial advice.

Employers should be encouraged.  Encouraged that workplace retirement plan participation and savings rates were up in 2020.  This, despite the economic and financial challenges wrought by the pandemic.  In addition, that employees value their workplace retirement plan as a savings vehicle.   The company match, is also reason for optimism.  It appears some Americans have their eyes on the prize – retiring before age 55.  It may be up to employers to revise their retirement plan design.  All should consider other creative innovations.  This will provide the support and guidance these employees need to achieve that early retirement goal.


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