Credit increased savings is something that doesn’t get talked about enough for American investors who want to be better prepared financially for retirement.
In fact, according to Fidelity Investments’ latest biennial Retirement Savings Assessment, the typical American household is on track to have 83 percent of the income they’ll need over the course of their expected retirement years – with about half in even better shape than that. To put this into perspective, fifteen years ago, when the assessment was first conducted, the projected figure was a bleaker 62 percent.
“It’s a testament to the hard work many families have made in taking control of their finances,” says Melissa Ridolfi, vice president of retirement and college leadership at Fidelity.
The study is based on a comprehensive national survey of 3,234 people identified as saving for retirement, age 25 to 74 in households earning at least $20,000 annually, and looked at assets such as retirement accounts, home equity, inheritances, and current or expected pensions and Social Security benefits. The one disheartening finding: Twenty-eight percent of respondents might just as well be walking around with bright red warning signs if they don’t take significant steps to make up their current shortfall.
Fidelity actually used color-coded indicators to give a fuller picture of households’ ability to cover their estimated expenses in a down market during those later years:
• Dark Green (“On Target”). Thirty-seven percent were on track to handle more than 95 percent of their expected expenses (up 5 percentage points from 2018).
• Green (“Good”). Seventeen percent were on track for 81 to 95 percent – the essentials, but not discretionary items such as travel and entertainment (down 1 percentage point from 2018).
• Yellow (“Fair”). Eighteen percent came in at 65 to 80 percent, hence face “modest adjustments” to their lifestyles (down 3 percentage points from 2018).
• Red (“Needs Attention”). Twenty-eight percent were completely off-track at less than 65 percent of expenses (down 1 percentage point from 2018).
The two factors driving the shift into the green?
First, the median savings rate has steadily increased over the years – it’s now at 10 percent, as opposed to 8.8 percent two years ago – with Baby Boomers socking away the most (11.7 percent of their salaries). Even Millennials, a generation noted for its crushing student loan debt, managed a rate of 9.7 percent.
And second – and here’s what’s often overlooked – improved asset allocation.
“Sixty percent of respondents are allocating their assets in a manner Fidelity considers age-appropriate,” Ridolfi says, “compared to 48 percent in 2006.”
One reason is that many workplace retirement plans began defaulting employees into target date funds and managed accounts over the past decade.
For those curious about their own retirement readiness, Fidelity’s free Retirement Score tool allows anyone to get their score and shows the percentage they’re anticipated to have saved versus their projected needed income. Better yet, you can also test out potential tweaks that would allow for a cushier retirement lifestyle.
And if cushy is what you crave, never forget three of the greatest “accelerants” for improving your preparedness. Specifically, by upping your savings rate to the recommended minimum 15 percent (including any employer 401(k) contributions), ensuring an age-appropriate asset mix, and deferring Social Security benefits until at least age 66 or 67, you could dramatically boost your total score to more than 100.
“Any one accelerator is clearly helpful,” says Ridolfi, “but all three combined could help bring you from a ‘good’ to a ‘great.’”
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