- Investors' preparedness for retirement has hit at an all-time high, according to a new study conducted by Fidelity.
- Still, more than half of Americans are not on track to cover their essential expenses in retirement.
- To improve your retirement readiness, consider saving more, working longer, and investing appropriately for your time frame, goals, and risk tolerance.
Saving for retirement is such a long-term project, it can be difficult to know if you're on track—or need to make some course corrections to lead the life you want down the road.
Fidelity's recent Retirement Savings Assessment (RSA)1 found that 50% of people are almost "in the green" when it comes to retirement savings. That puts the median retirement score at 80, meaning people on average are on track to have 80% of the income Fidelity estimates they will need to maintain their lifestyle in retirement.2
There are 4 categories on Fidelity's retirement preparedness spectrum, which are based on your ability to cover estimated retirement expenses, even in a down market:3
- Dark green: Very good (96 or over). On target to cover 96% or more of total estimated expenses.
- Green: Good (81–95). On target to cover essential expenses, but not discretionary expenses like travel, entertainment, etc.
- Yellow: Fair (65–80). Not on target to cover all essential retirement expenses without modest adjustments to planned lifestyle.
- Red: Needs Attention (less than 65). Not on target to cover all essential retirement expenses without significant adjustments to planned lifestyle.
A retirement score of 80 isn't quite "in the green"—that starts at 81—but it's very close. And it's a dramatic improvement over past surveys. America's median score was 76 in 2016, and only 62 in 2006. One possible reason for the improvement: People have been saving more. The national saving rate has more than doubled from 3.6% in 2006 to 8.8% currently.4 Market appreciation has likely played a role as well in the increase between 2006 and 2018.
How prepared are you? Find out with the Fidelity Retirement Score.
You may be able to improve your score no matter where you fall on the spectrum of retirement readiness.
Some things will make more of a difference than others depending on your age. For example, if you're "in the red," the steps you can take to improve your retirement readiness are different if you're young versus in or near retirement.
The RSA looked at 3 actions people can take to increase their retirement readiness:
- Save more
- Delay retirement
- Invest appropriately for your goals and time frame
To really make sure you're prepared to fund decades of retirement, consider taking advantage of all 3 of these of levers. Their impacts vary, but together they can be powerful.
Below we'll show you the single most impactful step you can take depending on your age.
In the red zone
If you're in the red you are not yet on target to be able to pay for basic living expenses in retirement. There's no way to sugarcoat it: People in the red zone need to save more for retirement right now. According to the RSA survey, the median savings rate for people who are in the red zone is 5%, including any employer contributions.
Many in this zone should also examine if they are invested appropriately given their time horizon until retirement, financial circumstances, and goals. According to the RSA results, 38% of people in the red zone have less than 20% of their retirement portfolios invested in stocks. It's hard to draw firm conclusions from that, but it could suggest that there is room for improvement with regard to investing, particularly for people with many years until retirement. For instance, nearly half of Millennials, 47%, have less than 20% of their investment mix in stocks.
"Perhaps the pain of watching their parents' investments shrink during the financial crisis soured them on stocks," says Ann Dowd, CFP®, vice president at Fidelity Investments. "But to reach their retirement goals, most young people, and particularly those who are behind in their retirement savings, need to invest for growth, and that means a significant allocation to a diversified mix of stocks."
The good news is that you can improve your retirement score, no matter your age. But that means taking action, and the sooner, the better.
If you're a Millennial and find yourself in the red, the most important thing to consider is increasing your savings rate. If you can start saving at age 25, aim to save at least 15% of income per year until you are 67. Following this path could help you stay on target for a comfortable retirement. And don't forget—any employer match or profit sharing to a 401(k) or other workplace retirement account counts toward the annual goal of saving 15%. If you start saving after age 25, you may need to save more than 15% in order to afford the lifestyle you want in retirement.
How saving more could help a Millennial: The median score for Millennials in the red zone is 48. Saving the suggested 15% of income boosts the median score more than 20 points, to 69.
To get to the green zone, also consider putting most of your portfolio in a diversified mix of stocks. With more than 40 years until retirement, you have time to withstand the ups and downs that come with the stock market, and benefit from its growth potential. From 1926 through 2016, stocks returned an average 10% annually, versus 5.4% for bonds and 3.5% for short-term investments. If you had invested $100 in stocks in 1926, it would be worth $587,000, versus $11,800 if you'd invested in bonds, and $2,300 in short-term instruments.5
To give your savings time to grow, you may want to consider working a few more years if you can. Taken together, increased savings, a more age-appropriate investment mix, and working until 67 could help you move safely into the green. Taking all 3 steps bumps the median score from 48 to 102.
Saving more and investing for growth will also help America's middle child. But to get from red to green, the most powerful step is delaying retirement. Doing so could give you more time to save, and more time for those savings to grow.
How retiring later can help a Gen X'er: The median score for Gen X'ers who fall into the red zone is 52. If they retire at their full retirement age (likely 67 for most Gen X'ers), versus 65, their retirement score increases 9 points to 63.
The next most important step is saving more. Just saving a little bit more can be helpful, but to really move the needle on your ability to retire, consider saving more than 15%. You can find out just how much with Fidelity's savings calculator.
Of course, investing for growth should also help. But the best strategy of all is taking all 3 steps. The result: Gen X'ers' median score jumps to 83, comfortably in the green.
Like Gen X'ers, the most impactful step Baby Boomers in the red can take to improve their retirement security is to work longer. Doing so can help maximize Social Security benefits and build savings. But getting to the green will likely take boosting saving and investing for growth too.
How retiring later could help a Baby Boomer: The median score for Boomers in the red is 52. Pushing back retirement from 65 to full retirement age (age 66–67 depending on when you were born) increases the score 5 points to 57.
To really boost your readiness for retirement, saving more is a must. But because Baby Boomers have fewer years for their savings to grow than, say, Millennials, saving at a higher rate is required to get to the same place.
Consider 2 savers, one is 25 and one is 55. Let's say each wants to retire at age 70 with $1 million in retirement savings and both are starting from scratch right now. In this example, let's assume they are both going to get a constant hypothetical, annual rate of return of 5.5% (of course, your results may differ).
To get to $1 million, the 25-year-old needs to save about $5,150 each year consistently for 45 years with no withdrawals. With 30 years fewer to save, the 55-year-old needs to save about $37,200 each year consistently for 15 years with no withdrawals—more than 7 times what the 25-year-old needs to save annually.
Investing for growth can also help Boomers' savings grow. Consider a diversified mix of investments that's appropriate for your goals, time frame, and risk tolerance. If retirement is more than 5 years away, it may not be wise to abandon stocks completely from your investment mix.
Taking all 3 steps can help Boomers in the red zone move their score from 52 to 64. To get to the green, saving more than 15% is necessary.
Read Viewpoints on Fidelity.com: The guide to diversification
In the yellow zone
If you're in the yellow, be encouraged by the fact that you've taken a lot of the right steps to prepare for retirement. You're part of the way there, but still need to do a little more work to afford your lifestyle in retirement.
People who are in the yellow zone have reported better saving and investing behaviors than those in the red. The median savings rate for those in the yellow zone is 8%. Only 25% of the people in this zone do not have an appropriate investment allocation. If you're in the yellow, now may be the time to kick it into higher gear if you can by saving a little more and considering working longer.
Millennials are still at the beginning of their careers and it's probably difficult to envision tacking on a few more working years. But since they are already strong savers, planning to work longer gives the biggest boost to their retirement readiness.
How working longer could help a Millennial: The median score for Millennials who are in the yellow is 73. Pushing back retirement from age 65 until 67 increases the median score to 81.
Taking all 3 steps can increase the median retirement score from 73 to 115.
Want to aim for an earlier retirement? Consider saving more money in order to boost your retirement preparedness. And remember to continue investing for long-term growth with a diversified portfolio tilted toward stocks.
For a Gen X saver in the yellow zone, the most impactful step to take will be increasing saving. Between raising families and caring for older parents, it's easy to lose sight of saving for the future. Figuring out how to save more—even just 1%—could have a significant impact on the retirement security of Gen X'ers.
How increasing savings can help a Gen X'er: Increasing the savings rate to 15% of total income boosts the median score from 73 to 80, just about in the green zone. Don't forget that this 15% includes any employer match or profit sharing contribution.
Planning to work a few more years can move the needle on Gen X'ers' preparedness as well. As we showed in the past section, giving your savings extra time to grow and compound can make a big difference in the amount of money you'll have for retirement spending. Taking all 3 steps for this group boosts their retirement score from 73 to 99.
Read Viewpoints on Fidelity.com: Just 1% more can make a big difference
Of all the generations, Baby Boomers are under the most pressure to get their financial house in order. With retirement looming, using all the tools available to increase savings is crucial. But the most important step to consider may be staying in the workforce longer. Working longer can give Baby Boomers extra time to save more money—and can give their retirement savings more time to grow. The additional benefit is that you'll have fewer years of retirement to fund.
How working longer can help a Baby Boomer: Working longer can move the median retirement score from 72 to 77.
Setting aside as much money as possible—and continuing to invest at least some of it for long-term growth—is also vital to improving your retirement score when you don't have the luxury of decades for compounding. The good news: Once you're over age 50 you can take advantage of catch-up contributions in retirement accounts like an IRA or a 401(k).
Taking all 3 steps moves Baby Boomers in the yellow zone into the green with a median retirement score of 81.
In the green zone
If you're in the green, congratulations! You're on target to cover your necessary expenses in retirement and maybe even have some left over for travel or hobbies.
Even though you're doing great, you may be able to improve. The 3 levers the RSA considers—saving more, working longer, and investing appropriately for your goals and time frame—can have a significant impact on retirement savings.
There are other steps you may still be able to take to get ready for retirement:
- Consider all of the tax-advantaged retirement accounts available to you. The contribution limit for 401(k)s in 2018 is $18,500. If you're over 50, you can save an extra $6,000 in catch-up contributions. Even if you're in the green, you may be able to benefit from more tax-deferred or tax-free growth in your retirement plan.
Don't forget about IRAs. This year you can contribute up to $5,500 to an IRA; if you're over 50 years old you can save an extra $1,000 in catch-up contributions. There are 2 basic types of IRAs: the traditional and Roth.
Read Viewpoints on Fidelity.com: Traditional or Roth IRA, or both?
- Consider a health savings account (HSA) if you have a high deductible health insurance plan. If you are able to save money in an HSA, the benefits can be very advantageous. That's because HSA accounts offer a triple tax advantage6: (1) Contributions that are made with pretax dollars reduce your current taxable income; (2) earnings on the investments in an HSA are not taxed; and (3) withdrawals are tax free if used to pay for HSA-qualified medical and health care expenses.
If you're able to save the maximum in an HSA every year and invest this money for growth, you may finish your career with a sizable amount of potentially tax-free money to spend on health care in retirement. That assumes you can meet the deductible on your health insurance out of pocket until you leave the work force and are able to leave the money invested through your working years.
Read Viewpoints on Fidelity.com: 3 healthy HSA habits
- Consider the tax efficiency of your investments. Strategically putting highly taxed investments, like those that generate interest income or short-term capital gains, in tax-advantaged accounts like 401(k)s, IRAs, and HSAs, and holding those that are taxed at lower rates in taxable accounts could help boost your after-tax returns.
Read Viewpoints on Fidelity.com: Why asset location matters
Use every available strategy
Saving enough to fund your retirement is a long-term project. It takes commitment and consistency over decades. You can make it a little bit easier by taking advantage of all the 3 strategies that the RSA highlights: Save more; invest in a mix of stocks, bonds, and cash that fits your situation; and consider working a few more years beyond your planned retirement age. If you're not on target for a secure retirement yet, don't worry—there are still steps you can take to improve your retirement readiness no matter what zone you are in or how long you have until retirement.
Next steps to consider
Take advantage of potential tax-deferred or tax-free growth.
Learn ways to invest your money and create a plan of action.
Consider these 4 guidelines to help you reach your retirement goals.