Most Plan Participants Seriously Uninformed About How Much to Save, 4% Rule

Principal research finds vast majority of workers are utilizing their 401(k), but have big misconceptions around savings benchmarks and planning for income in retirement
Participant retirement misconceptions
Image credit: © Chadchai Krisadapong | Dreamstime.com

First, the good news… Nearly nine-in-10 workers (88%) are building their retirement nest eggs in some way—and the vast majority (89%) are utilizing their employers’ retirement plan to do so, according to recent research from Principal Financial Group.

“The same Americans who are showing strong savings behaviors and momentum also lack confidence in their retirement readiness.”

Principal’s Chris Littlefield

Indeed, saving for retirement was the top financial priority for those surveyed, according to the Principal research (500 full-time workers at companies with 2-10,000 employees offering at least health insurance or retirement benefits). Additionally, 58% of those surveyed are committing at least 9% of their annual income toward retirement. That’s all fine and dandy. But despite the majority of workers surveyed feeling confident in their understanding of how to save, most lack alignment with common industry recommendations that could help them feel more certain about their financial future.

Many report feeling behind on their retirement goals (34%) and are uncertain they will maintain their standard of living after leaving the workforce (32%).

“Retirement savers were resilient in 2024, socking away money at a robust rate despite inflation and interest rate pressures,” said Chris Littlefield, president of Retirement and Income Solutions at Principal. “However, the same Americans who are showing strong savings behaviors and momentum also lack confidence in their retirement readiness.”

That disconnect between how people are saving for retirement and how they feel about their retirement readiness, Principal says, could stem from those aforementioned misconceptions around savings benchmarks and planning for income in retirement.

Over half of employees surveyed (56%) believe they should have at least 30 times their annual salary saved by age 65 to live comfortably in retirement when 10 times may be sufficient (just 19% of respondents said 10-12 times their annual salary would allow them to live comfortably in retirement). Baby Boomers were most likely to say 10-12 times would be sufficient, but only 23% said so compared to 17% of Gen X and 14% of Millennials and Gen Z.

Additionally, 54% think they can safely withdraw 10% or more of their retirement savings annually without outliving their nest eggs despite a common retirement planning rule of thumb being approximately 4%. In fact, in December 2024, Morningstar revised its recommendation of the starting withdrawal rate for retirement over a 30-year time horizon to 3.7%, down from 4% in 2023.

While there is a knowledge gap around best practices for saving and planning for income in retirement, two-thirds (66%) of employees recognize they need help. Nearly three-quarters (72%) of employees are comfortable getting retirement savings help from a financial professional, and 62% are comfortable receiving it from their employer. And, the benefits of increased participation and engagement can be significant considering eight-out-of-10 people say financial professionals provide confidence they’ve made the right decisions.

“People are seeking more comprehensive help and advice as they plan for retirement, which is increasing the importance of taking a holistic view of their needs in retirement beyond just the amount they need to save,” Littlefield said.

Economic outlook for SMBs

The Principal research found the landscape for small-to-midsized businesses is softening from record hiring and growth in the first half of 2024 to cautious optimism and stable staffing.

Recent survey data from the Principal Financial Well-Being Index shows most business owners (64%) surveyed are balancing optimism about their own 12-month outlooks with declining confidence in the U.S. economy (14-point decrease) and their local economies (12-point decrease) since last July.

Economic inflation remains the top concern for both employers and employees, with findings showing both groups continue to feel pinched. Notably, only 44% of employees report their wages are keeping up with inflation.

At the same time, the outlook for hiring and retention has softened. Employer concerns about employee retention fell from 46% in July 2024 to 32% in November 2024, while concerns about attracting talent dropped from 39% to 33%.

“We’ve seen ongoing small business growth, reaching post-pandemic highs in 2024. While we expect to see that growth continue, we could see a slowdown as business owners continue to battle inflation,” said Amy Friedrich, president of Benefits & Protection at Principal. “It will be critical for small-to-midsized business owners to closely watch the impact of new economic policies—particularly those with tax implications—along with changes in credit and lending markets and adjust accordingly to do what’s right for their employees, customers, and the health of their business.”

Click the links for more insights from the latest Principal Real Life Retirement Journeys and Principal Financial Well-Being Index surveys.

EDITOR’S NOTE: This article has been updated to correct the number of employees surveyed as provided by Principal. 500 employees were surveyed instead of the 200 originally posted.

SEE ALSO:

• SECURE 2.0 Provisions Remain a Top Priority for Plan Sponsors

• Key DC Trends Shaping the Retirement Industry in 2025

• Morningstar Lowers Retirement Withdrawal Rate to 3.7%

Brian Anderson Editor
Editor-in-Chief at  | banderson@401kspecialist.com |  + posts

Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.

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