Are you on track to save the proper amount for your retirement? If so, you are in the minority according to Fidelity's latest biennial Retirement Savings Assessment survey.
Retirement Saving Improves, But Not Enough
While the 2015 survey shows improvement over the 2013 results, the numbers are still sobering. Approximately 45% of Americans in 2015 were estimated to be able to cover all of their essential living expenses in retirement with their given savings habits. Essential expenses include housing, food, and out-of-pocket health care expenses. Only 38% of survey respondents were similarly prepared in 2013.
Fidelity displays retirement readiness using a unique Retirement Preparedness Meter (RPM) that color-codes likely retirement preparation in an automobile-dashboard format. The color codes correlate to the percentage of total estimated expenses that a person could cover in retirement during a down market.
Dark green reflects the ability to cover over 95% of total expenses in retirement, while green represents between 81% and 95% coverage. 27% of future retirees fall into the dark green category while 18% fall into the green category.
Yellow reflects retirement coverage between 65% and 80% and the need for simple lifestyle adjustments. 23% of people are in this category. Red reflects less than 65% coverage, requiring major lifestyle adjustments for the 32% of people in this category to be ready for retirement.
Despite these seemingly grim numbers, there is reason for optimism. Improvements were made in all age groups. Baby boomers born between 1946 and 1964 are saving the most — as they should, since they are approaching retirement quickly. Baby boomers increased their savings from an average of 8.1% of their income in 2013 to 9.7% in 2015. Millennials born between 1981 and 1990 made the largest improvement of all age groups with an increase from 5.8% in 2013 to 7.5% in 2015. Overall savings increased from an average of 7.3% of salaries in the last survey to 8.5% in 2015.
Savings are considerably below the 15% of income recommended by Fidelity, and catching up requires different strategies at different ages. Millennials can increase their savings and take more risk with their asset allocation, while baby boomers may have to consider working longer to close the gap. At the very least, baby boomers should wait to retire until reaching the full retirement age of 67 instead of retiring at the minimum age of 62. Doing so will increase benefits by 30%. Waiting even longer to retire gains delayed retirement credits that increase benefits by another 8% annually until age 70.
At any age, it makes sense to review your asset allocation and adjust it to be age-appropriate with respect to risk and the necessary returns. The Fidelity study found that an increasing number of survey participants have age-appropriate portfolio balances (62% in 2015, up from 56% in 2013).
The best ways to increase and maximize savings are to start as early as possible in order to make the most of compounding and to take advantage of all possible tax-deferred programs. Try to make maximum contributions to any IRAs or 401(k) plans to receive the greatest tax benefit, and pay special attention to any matching 401(k) benefits from your employer. Matching contributions are in essence free money.
We may not all be fully secure with our retirement savings plans yet, but at least we are headed in the right direction as a nation. Do your part and make sure that your retirement savings plan is able to get you through any potential tough times.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.