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401k Frown—Savers Severely Underestimate Retirement Needs

Participants believe they'll need only this much

This is discouraging.This is discouraging.

There’s a reason the industry is hammering home the need for financial wellness—401k participants aren’t saving enough, and are unaware of how much they’ll actually need.

A new (and depressing) examination of the topic from Fidelity found many respondents believed only two to three times their last annual income amount would be enough to see them through. Even with reduced spending in retirement, most 401k advisors agree it falls far short of needed resources to fund what is rapidly becoming 20, 30 and even 40 year retirement periods.

A number of other glaring examples of incorrect beliefs and behaviors on the part of the saving public were also found, starkly illustrated in eight simple questions for retirement success asked by the Boston-based behemoth (correct answers helpfully provided).

Saving for Retirement

No. 1: Roughly how much do investment professionals estimate people save by the time they retire?
The correct response is “at least 10 times the amount of one’s last full year’s income.” Even if there is some debate among professionals around how much the average person needs to save, nearly three-quarters (74 percent) of respondents underestimated how much is needed. Furthermore, 25 percent of respondents expected to only need to save 2-3 times the amount of their last full year income, a number that is well below suggested/estimated targets. For pre-retirees, 19 percent of respondents aged 55-65 answered 2-3 times, which is more concerning because this group has far less time to make up for the shortfall.

No. 2: How often over the past 35 years do you think the market has had a positive annual return?
The survey revealed that the majority are unaware that the market has enjoyed a positive annual return 30 out of the past 35 years. Historically the U.S. stock market has gained about seven percent per year, so it’s important to invest in stocks to provide opportunities for growth. Only eight percent of overall respondents answered correctly while 55-65 year-olds fared a little better at 14 percent.

No. 3: If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest if it grew at the historical stock market average?
The correct answer is about $40,000, which 16 percent answered correctly. However, nearly half (47 percent) underestimated how big an impact relatively small savings can have over time. Twenty-seven percent of respondents calculated the answer to be about $15,000, which undervalues the power of consistent savings and would represent a zero percent stock market return vs. the market average of seven percent.

Preparing for Retirement

No. 4: Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?
While one’s longevity is influenced by factors such as family medical history and lifestyle (exercise, diet, etc.), the average life expectancy is about 87 (85 for males, 87 for females), meaning the answer is approximately 22 years—a number one third of respondents got right. Thirty-eight percent of Americans estimated they would only need to make their hard-earned savings last for about 12-17 years, which could leave some at risk of running out of money in retirement. Since people are living longer, healthier lives, many—especially younger generations—need to plan for a retirement lasting 30 years or more.

No. 5: Approximately how much did the average monthly Social Security benefit pay in 2016?
Social Security is a key part of retirement income for most Americans, so it’s encouraging 43 percent of respondents answered this one correctly: about $1,300. Even better, half of pre-retirees got it right. Still, with over 75 ways to claim and dozens of factors influencing one’s decision of when to retire, $1,300 is simply an average.

Living in Retirement

No. 6: About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?
As a general rule of thumb, Fidelity suggested limiting portfolio withdrawals to no more than four to five percent of initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Although four out of 10 (42 percent) pre-retirees answered correctly, 38 percent of those over the age of 55 said they could withdraw seven percent or more of their savings annually, putting many at risk of quickly running out of savings in retirement. Also, 15 percent of this age group felt they could withdraw 10 to 12 percent annually—a rate that could drain many households of savings in less than a decade.

No. 7: What do you think is the single biggest expense for most people in retirement?
For most Americans, housing, health care and transportation are typically the largest expenses in retirement, but housing by far tops that list. In fact, for many retirees, housing can make up nearly half of their expenses. While 17 percent of respondents answered this correctly (and 13 percent of those aged 55-65), a larger number of respondents (69 percent) thought health care would be the largest expense. This is perhaps an indication of the deep concern many Americans have around an expense that is difficult to predict, since it involves the state of one’s health among other factors, including skyrocketing health care costs in recent years. Of note, health care was also the No. 1 item respondents were most worried about being able to afford—including 63 percent of pre-retirees.

No. 8: About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?
Fidelity estimates the average 65-year old couple retiring in 2016 will spend $260,000 to pay for out-of-pocket health care expenses over the course of retirement. Only 15 percent were on the mark, with 72 percent underestimating the true amount of health care costs. Overall, 22 percent (including 19 percent of pre-retirees) underestimated how much they would spend by about $200,000.

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