Finally, there is some good news on the retirement front. Americans are saving more and investing more appropriately for their age, improving the overall state of retirement readiness, according to a new retirement savings assessment study that Fidelity Investments released Thursday.
As a result, 45% of Americans are now on track to live comfortably in retirement, up from 38% reported in the previous study conducted in 2013. However, that means more than half — 55% — are still at risk of being unprepared to completely cover essential living expenses in retirement, which includes housing, health care and food.
But by embracing a few, achievable steps, the majority of Americans could be on track for a secure retirement.
“Even in the midst of unsteady market conditions and pockets of global instability, it's extremely encouraging that so many people have taken positive steps to improve their ability to live comfortably in retirement, with many saving more, spending less and making smart investment decisions,” said John Sweeney, executive vice president of retirement and investment strategies at Fidelity.
Mr. Sweeney attributed much of the improvement to automatic features that are increasingly available in 401(k) plans around the country. By automatically enrolling new employees (and in some cases, re-enrolling existing employees) in company retirement plans, automatically depositing their contributions in an age-appropriate target date funds and automatically escalating employee contributions each year, usually by 1% of salary, plan sponsors are playing a major role in improving workers' chances of achieving a secure retirement.
The survey results are based on comprehensive responses from 4,650 participants, ages 20 to 70. The responses were benchmarked and weighted against the Bureau of Labor Statistics' 2014 Current Population Survey. Fidelity then ran the data through the extensive retirement planning platform that it uses with its customers to create a single score that measures a household's ability to cover estimated expenses in retirement. It also allows comparative views of preparedness across generations.
Using this score, households fall into four categories on the retirement preparedness spectrum: dark green (on track, greater than 95% prepared); green (good, 81-95%); yellow (fair, 65-80%); and red (needs attention, less than 65% prepared).
Overall, America's retirement score in the 2015 survey was 76%, which is in the yellow zone. That means many will fall short of completely covering essential retirement expenses and potentially require sacrifice such as spending cuts that may diminish their quality of life in retirement. But the good news is Americans are now only four percentage points away from the green zone, a significant improvement from 2013 when the overall score was 69.
“While many aren't completely on track, there are steps people can take — regardless of age or income level — to help get on a path to green and plan for their someday,” Mr. Sweeney said.
Increasing savings, reviewing asset allocations and working longer are all powerful tools to improve retirement security, but their relative effectiveness depends largely on time remaining until retirement.
Baby boomers, now ages 51-69, received an overall retirement score of 82. Those falling short of their goals should consider working a few years longer if possible, at least until full retirement age to increase Social Security benefits.
Gen Xers, ages 35-50, have an overall retirement score of 73 but they still have 15 years or more to achieve green status. For this generation, the most powerful steps are to increase savings and make sure their assets are allocated appropriately.
Millennials, ages 25-34, are the furthest from retirement but are in fairly good shape. They achieved a retirement score of 70 — a sharp improvement from the 61 they logged two years ago. With time on their side, their single most powerful step is to increase savings. Fidelity recommends saving 15% or more of gross income, including any employer match.
“It is easier to convince a 20-something to live on 85 cents of every dollar they earn right from the beginning,” said Mr. Sweeney. “It is harder for more established workers, but we urge them to bank their bonuses or raises rather than succumb to lifestyle creep.”
A PERSONALIZED SCORE
Fidelity has introduced a new personalized retirement tool that allows anyone to find out how prepared they are for retirement — and how they stack up against others — by answering a few key questions about age, income, current account balances and monthly savings.
It's certainly not comprehensive financial planning, and it doesn't take into account marital status or non-retirement assets. But it can be a great conversation starter. And benchmarking personalized results against Americans of similar ages and income can create a powerful incentive to boost savings — a modern version of keeping up with the Joneses.