Many Americans Not on Track to Completely Cover Basic Living Expenses in Retirement, Six Steps Can Improve Retirement Readiness by More Than 40 Percent
BOSTON – Despite improvements in the economy, many working Americans are falling behind on retirement preparedness, with 55 percent in fair or poor condition when it comes to being able to completely cover estimated essential living expenses in retirement, including housing, health care and food, according to Fidelity Investments®' new Retirement Preparedness Measure (RPM). The RPM, which is based on data from Fidelity's 2013 Retirement Savings Assessment survey, is a measure of whether working Americans are on track to cover their estimated total post-retirement expenses. It introduces—for the first time—a single score that provides a comparison across generations, combining comprehensive survey data with the retirement planning methodology Fidelity makes available to its customers.
Under the RPM, working Americans fall into four categories on the retirement preparedness spectrum. The categories are linked to a numeric range (the higher the better), based on an individual’s ability to cover estimated retirement expenses, even in a down market1:
- Dark Green: Very Good or Better (95 or over). These households are on track to cover 95 percent or more of total estimated expenses, even in a down market. 33 percent of those surveyed were dark green.
- Green: Good (80-95). On track to cover at least essential expenses, but not discretionary expenses like travel, entertainment, etc2. 12 percent of those surveyed were green.
- Yellow: Fair (65-80). Not on track to sufficiently cover all essential retirement expenses, with modest adjustments to their planned lifestyle likely. 14 percent of those surveyed were yellow.
- Red: Poor (less than 65). Not on track to sufficiently cover all essential retirement expenses, with significant adjustments to their planned lifestyle likely. 41 percent of those surveyed were red.
America's RPM is in the Yellow, But There Are Ways to Help Get to Green
According to the RPM, many Americans are likely to fall short of meeting their retirement income goals, unless they act soon. In fact, the median score indicates working Americans are on track to meet just 74 percent of their estimated retirement expense goals and face a 26 percent income gap, placing them in the “yellow zone” and forcing them to make spending cuts in retirement that may diminish their quality of life—especially if the market experiences a severe downturn.
Here's a closer look by generation:
- Baby Boomers (born 1946-1964): The good news is that Boomers are on track to reach 81 percent of their goals, which places them in the "green zone." While Baby Boomers entering retirement over the next five-to-10 years are in fairly good shape to completely cover at least essential expenses, this generation has less time to take actions that can help move them into "dark green" and be able to completely cover total estimated expenses. They also have fewer options than their younger counterparts to make up any shortfall.
- Gen X (born 1965-1977): Gen X respondents are at 71 percent of their goal, placing them in the yellow.
- Gen Y (born 1978-1988): Gen Y respondents—who are the furthest away from retirement—are currently falling significantly short and are in the red at 62 percent. This number is a concern, since the survey indicated many anticipate retiring early, despite the fact they probably won’t have the benefit of a pension, as their parents did. The good news for this generation: time is on their side, which means they can improve their situation by increasing their savings rate and investing for growth.
Part of the problem is that many Americans save too little—in fact, the survey indicates 40 percent of survey respondents are saving less than 6 percent of their salaries today, which is far less than the recommended 10-15 percent suggested by Fidelity. Among Gen Y, that percentage jumps to 51 percent, versus 43 percent for Gen X and 34 percent for Boomers.
"This savings shortfall is one of the biggest reasons the median RPM is in the yellow, although there are several others, too," said John Sweeney, executive vice president of Retirement and Investment Strategies at Fidelity. "When you factor in the expectations many have of an early retirement, along with increasing longevity and sometimes overly conservative asset mixes for investments, you can see why many people are not as prepared as they need to be to cover their expected expenses in retirement."
Behind the RPM
The RPM is based on the results of Fidelity's 2013 Retirement Savings Assessment, a regular survey of more than 2,200 households. The RPM compares retirement preparedness for a wide cross-section of the population, using the survey responses to set retirement income targets3 for each participant, based on Fidelity’s income replacement methodology4.
"We conducted a comprehensive analysis of more than 2,200 responses and ran them through the planning models we use with millions of customers to provide an in-depth picture of the state of retirement preparedness in America today," said Sweeney. "While it's no secret our country faces a looming retirement challenge, the key to making progress is for Americans to know where they stand on the retirement spectrum, and more importantly, understand what can be done to improve their preparedness. Although it requires discipline and some tradeoffs, there are important steps people can take to accelerate their retirement savings and get closer to where they need to be in the long run, no matter what their age or income level."
Six Accelerators Improved the Retirement Preparedness Measure by 42 percent
Too many individuals are not planning adequately for retirement because they are unsure where to start or are concerned their personal retirement income goal may be unattainable. However, there are six actions that can be taken regardless of income levels or the economy to gain control over your financial future and boost retirement preparedness: three before retirement and three after5.
Pre-retirement accelerators to consider now:
- Raise savings now. While there are many demands on a family's budget, even small increases in savings can make a big difference. For younger people especially, the single most powerful step is to increase savings. Some relatively painless ways to do so include investing whatever raises you receive into savings or increasing contributions to a workplace savings plan by just one percent every year. Make the most of tax-advantaged savings vehicles such as 401(k)s, IRAs, Health Savings Accounts and tax-deferred annuities. Also consider a Roth IRA6 or 401(k), where contributions are after-tax but withdrawals are income tax free. As a general guideline, set an annual savings goal of 10-15 percent or more of your income (which includes any employee match you may have). Saving at this level pays off: by adjusting the savings rate to at least 15 percent, the median RPM score of 74 increases by 11 percent to 82.
- Review your asset mix. Although you can't control market behavior, you can build the potential for long-term growth into your portfolio through your investment choices and exposure to various asset classes that can provide growth and outpace inflation. By replacing portfolios that are either too conservative or too aggressive with an age appropriate allocation, the median RPM score of 74 increases by 4 percent to 77.
- Retire later. The longer you can wait, the more time you will have to build savings. Also, waiting until age 70 to take Social Security will help maximize your monthly benefit. For example, if you can afford to wait until age 70, your Social Security income will increase by 30 percent. By adjusting the reported expected retirement age to the full Social Security Retirement Age (between 65-67), the median RPM score of 74 increases by 12 percent to 83.
Once you've reached retirement, consider the following accelerators:
- Return to work part-time. This can boost income and help you stay active and involved.
According to the Retirement Savings Assessment survey, 50 percent of households plan to have at least one person working in retirement. By adjusting the median RPM to project income earned if respondents worked from one to five years in retirement, the median RPM score of 74 increases by 7 percent to 79.
- Realize home equity. Downsizing and reinvesting all of the proceeds from a home can provide you with equity you might not have considered. By factoring in the possibility that all respondents will downsize and convert 25 percent of their estimated home equity into investable assets for retirement, the median RPM score of 74 increases by 4 percent to 77.
- Reallocate part of your savings into an annuity. To add another guaranteed income source to the mix, along with sources such as Social Security or pensions, consider a fixed lifetime income annuity at or before retirement. While such annuities provide little or no access to the principal used to purchase them, the guaranteed income they provide can help ensure that at least essential expenses are covered throughout retirement with lifetime income sources. By annuitizing7 40 percent of retirement savings, the median RPM score of 74 increases by 5 percent to 78.
"Our analysis shows that using these six 'accelerators'—either individually or in combination—can have a substantial impact on retirement preparedness,” said Sweeney. "In fact, when all six are applied, the Retirement Preparedness Measure jumps an impressive 42 percent, putting many more individuals in a better financial position to truly enjoy their golden years."
Other retirement resources
To learn more about improving your retirement preparedness, Fidelity has introduced an interactive Retirement Readiness quiz, as well as free resources, including:
- Educational Fidelity Viewpoints® articles, including "Rev Up Your Readiness to Retire," "What Will You Spend in Retirement?" and "Should You Take Social Security at 62?", as well as a Retirement Roadmap Special edition devoted exclusively to retirement planning.
- Seminars and online learning modules to help you learn about key retirement issues and how to prepare for them.
- Fidelity offers workplace retirement investors Plan for Life, which provides education and guidance to help employees create their own unique retirement plans.
- Visit one of Fidelity's 183 Investor Centers or call 1-800- FIDELITY (1-800-343-3548) for a consultation with an investment professional.
About the Fidelity Investments® Retirement Savings Assessment
The findings in this study are the culmination of a year-long research project with Strategic Advisers, Inc.—a registered investment advisor and a Fidelity Investments company—that analyzed the overall retirement preparedness of American households based on data such as workplace and individual savings accounts, annuities, projected Social Security benefits, home equity and pension benefits. The analysis for working Americans projects the income replacement rate for the average household, compared to pre-retirement income, and models the estimated effect of specific steps to help improve preparedness based on the anticipated length of retirement.
Data for the Fidelity Investments Retirement Savings Assessment (RSA) were collected through a national online survey of 2,265 working households earning at least $20,000 annually with respondents age 25 and older from June through October. Data collection was completed by GfK Public Affairs and Corporate Communication using GfK’s KnowledgePanel®, a nationally-representative online panel. Fidelity Investments was not identified as the survey sponsor. GfK Public Affairs and Corporate Communication is an independent research firm not affiliated with Fidelity Investments.
The RSA calculations rely on the proprietary asset-liability modeling engine of Strategic Advisers, Inc., which has been providing asset allocation, retirement and tax-sensitive investment management services to Fidelity's individual and institutional clients for nearly two decades. Using its modeling engine, Strategic Advisers generates the percentage of potential pre-retirement net income that each individual American household surveyed is likely to replace upon retirement. The RSA represents the median (or midpoint) for accumulator households and income and age cohorts.
This analysis is for educational purposes and does not reflect actual investment results. An investor's actual account balance and ability to withdraw assets during retirement at any point in the future will be determined by the contributions that have been made, any plan or account activity, and any investment gains or losses that may occur. For more information on Fidelity Investments®’ 2013 RSA, an executive summary and infographics can be found on Fidelity.com.
About Fidelity Investments
Fidelity Investments is one of the world's largest providers of financial services, with assets under administration of $4.5 trillion, including managed assets of $1.9 trillion, as of October 31, 2013. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.
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