Vanguard’s latest “How America Saves” report shows that Americans continued to save for retirement in 2022 despite volatile market conditions throughout the year. Joel Dixon, Global Head of Advice Methodology at Vanguard, analyzes the numbers from Yahoo Finance Live.
video transcript
Rachel Akufo: Well, it’s never too early to start saving for retirement. With inflation soaring, expectations of more interest rate hikes, and fears of a possible US recession, investors continue to look for best practices to keep their portfolios protected. Well, Vanguard’s annual report summarizes how America Saves summarized the savings behavior of nearly five million defined contribution plan participants across all Vanguard businesses last year.
And despite all the uncertainty in this tough economic climate, retirement savers are sticking to their policy. The data highlight that Americans have generally remained resilient to delving deeper into the report, and were joined by Joel Dixon, Vanguard’s global head of advice methodology. increase. Thank you for joining us this morning, Joe. So how surprised are you about how resilient savers are despite everything happening in the macro environment?
Joel Dixon: Well, Rachel, thank you for coming today. I don’t know if it’s actually that amazing. This is a continuation of a trend we’ve seen in the retirement plan market over the past 10-15 years: the concept of resilience. But it was in a more favorable market environment in many ways.
Last year was, as you mentioned, much more difficult, with high inflation, market volatility and uncertainty. But the concept of resilience is still showing up in action, and even getting better during 2022. You can see that by looking at the savings rate. For example, more than 25% of his plan participants donated more than 10% of his income to long-term retirement savings. And last year saw a record high average deferral rate of almost 7.1/2%.
Rachel Akufo: So what are the most effective ways people have increased their savings over the past year?
Joel Dixon: In fact, the main effective change in the last decade or so has been the substantial growth of automated investment programs and approaches in the workplace retirement plan arena. Auto-registration, auto-escalation of savings and use of a single investment solution for auto-investing (so-called target date funds are a common example of this) have enabled very broad access at low cost. . A well-diversified and appropriate asset allocation portfolio for plan participants.
And the fact that roughly three-quarters of plans with over 1,000 participants now offer these automatic savings features is testament to that growth. And we see it in many ways: good behavior on the part of participants, increased savings rates, increased plan participation rates, and even reduced trading by participants in response to market volatility and market events.
Rachel Akufo: So for those of you wondering if professionally managed accounts or AI is better for you, or if you’re looking to do it yourself, what are the benefits of combining them? do you want?
Joel Dixon: Well, that’s interesting. We clearly see something like the next growth area in the retirement planning space, in many ways, in terms of plan design and plan options. This is the concept of low-cost personalized advice that can actually be offered to people who don’t have retirement money. Time, willingness or ability to manage long-term portfolios to meet goals in a more automated manner.
And indeed, there has been an increase in retirement plan offerings in terms of advice, with low-cost advice now being available to a much higher percentage of retirement plan participants. About two-thirds of people rely on professionals to meet their long-term needs for savings and investment strategies.
And being able to do this directly through retirement plan options is, in many ways, the next way to really enhance long-term investor performance within retirement plan design and context. .
Rachel Akufo: And it makes more sense, as the economy clearly appears to be in a much more nuanced phase than it was pre-coronavirus. But I’d like to hear some important tips for setting and sticking to savings goals, especially when you look at the amount of debt people have, and I’m trying to figure out should I save or should I save? Isn’t it? Am I paying off my debt? What are your top tips for really increasing your savings?
Joel Dixon: First of all, I think the most important thing is that we all love to talk about and follow markets, economies, etc. And as you said, Rachel, there’s a lot of nuance these days, so to speak. But over time, your long-term success as an investor, for example in achieving your retirement goals, is actually, in many ways, entirely under your control, through your own actions. I have.
By saving enough, minimizing costs such as taxes, investment costs and intermediate transaction costs, ensuring a suitable mix of low-cost, diversified investments aligned with your long-term goals, and sticking to that plan. , over time, these will enable long-term success in a variety of market and economic conditions.
I would say that there are some really advanced tips for people trying to manage their debt, investing and saving for their retirement plans. First of all, make the most of your employer match as much as possible. And think about paying off really high-interest debt and never paying it off again.
By the way, and I think this is important, debt repayment is also a form of savings. All of this therefore expands your future long-term savings potential. You’ll also need to think about how you’ll deal with future economic conditions and storms, perhaps by having some cash at your disposal if you need it.
Rachel Akufo: We appreciate these tips and many of you will always find them useful. Special thanks to Joel Dixon, Global Head of Advice Methodology at Vanguard. Thank you for your time this morning.
Joel Dixon: thank you very much.
