More Americans are better prepared for retirement
When it comes to saving for retirement, any progress is worth noting. So, take note of this: The percentage of Americans who are on track to live comfortably in retirement jumped from 38 percent in 2013 to 45 percent in 2015, according to a recent report from Fidelity Investments.
Before you celebrate, however, consider that more than half of Americans (55 percent) are still at risk for being unprepared to pay for essential living expenses in retirement including housing, medical care and food.
Fidelity surveyed 4,650 households about their savings habits and other financial circumstances, then ran their responses through the retirement planning platform it uses for its own customers. Using these responses, Fidelity tabulated a score that measures a household's ability to cover estimated expenses in retirement. It reflects how much each household contributes toward retirement, how their savings are allocated among various types of investments, their health and their overall level of activity.
Fidelity attributes most of the progress in retirement readiness to two factors: saving more and better asset allocation.
Americans' savings rate increased from 7.3 percent of pay on average in 2013 to 8.5 percent in 2015. These amounts include any matching contributions from an employer. Predictably, Fidelity found that boomers are contributing more toward retirement (9.7 percent on average) compared to Gen X (8.5 percent) and millennials (7.5 percent).
But all these averages fall short of Fidelity's recommended total contribution of 15 percent.
Since 2013, workers have also improved asset allocation decisions based on their age. In 2015, 62 percent of survey respondents allocated their retirement savings among various types of assets such as stocks, bonds and cash investments in a manner Fidelity considers appropriate for their age, compared to 56 percent in 2013. Generally an age-appropriate asset allocation reduces your exposure to equities as you age, such as the asset allocation glide path in a target date fund.
Fidelity's study found that nearly four in 10 millennials were more conservatively invested than guidelines appropriate for their age versus fewer than one in four boomers.
Calculations of retirement readiness make a number of assumptions that may or may not fit your circumstances. For example, the Fidelity study assumes you'll retire at age 65 and that you'll maintain your current essential living expenses in retirement. Working longer or being willing to reduce your standard of living will improve any measure of retirement readiness.
Fidelity reports on three accelerators that can improve retirement readiness:
- Save the recommended 15 percent of pay (if your employer matches your contributions, it counts toward this goal).
- Replace retirement portfolios that are either too conservative or too aggressive by allocating your assets according to age-appropriate guidelines.
- Work later, at least to your Social Security full retirement age (currently 66 for early boomers, increasing to 67 for millennials).
In fact, if all Americans adopted these steps, we would all be able to retire comfortably, according to Fidelity's report.
Of course, there are other ways to improve your financial security, including working part time for period of years, reducing your living expenses by doing such things as downsizing or paying off your mortgage, and reducing the amount you spend on medical bills by improving your health and becoming a wary medical care consumer.
The good news, according to Fidelity, is that America's retirement problems might be "fixable." This assumes, of course, that Americans are either willing or able to take the recommended action steps.
Unfortunately, many Americans' budgets are already stretched thin, and saving more is often postponed to some time in the future, in spite of good intentions. And working longer may be more of a hope than a reality, since many workers may not be able to continue working as long as they would like.
Despite these obstacles, the Fidelity report provides a vision and tools to address America's substantial retirement challenges.