The latest Retirement Savings Assessment from Fidelity Investments released today reveals a significant decline in retirement readiness, with American savers now projected to have only 78% of the income needed to cover estimated expenses during retirement.
As American savers continue to navigate market volatility and disruption, “America’s Retirement Score” has moved back into the yellow to 78, which is a five-point decline from an all-time high of 83 reported in 2020, before the pandemic.
The assessment finds over half (52%) of those surveyed may need to make modest to significant adjustments to their retirement lifestyle if they don’t take action to make up for the shortage. More than one-third (34%) of households are in the red on the preparedness spectrum, meaning significant adjustments may be likely. Notably, the assessment is based on a household’s ability to cover estimated retirement expenses in a down market.
The decline in preparedness is being driven by two primary factors: people are saving less and investing more conservatively, which are natural reactions during a challenging financial environment, from the pandemic to market volatility to the latest turmoil in the banking industry. In fact, among those taking a conservative approach, nearly six in10 (57%) respondents expressed concern about losing their savings by investing too aggressively.
“American savers continue to navigate through uncertainty, and as a result, may consider pulling back on saving for the future,” said Rita Assaf, vice president of retirement at Fidelity Investments. “When it comes to long-term investing, staying focused on your individual goals is critical. Having a plan in place is one solid way to help weather any storm, as we’ve seen the last few years and weeks with the pandemic, inflation and market volatility.”
Millennial preparedness drops most
Interestingly, the research shows Millennials experienced greatest decline in preparedness among generations since the study was last conducted in 2020, despite having the highest increase in income.
Even though Americans across generations have more money saved since 2020 (up by $40,000), Millennials and Boomers decreased their savings rate (down by 0.2% and 2.2%, respectively) while Gen X-ers increased their savings rate (up by 1.4%). Looking at median incomes, Millennials saw the biggest increase since 2020 (up by $12,500), while Gen X stayed flat ($120,000).
Age-appropriate equity allocations also declined, particularly among Millennials. The study finds the percentage of respondents allocating assets in a manner Fidelity considers age-appropriate is at 59.4%, a slight decline (by 0.6%) from 2020. Millennials saw the largest drop, by 2%, which means many may not have the appropriate number of equities when considering their long-term goal.
3 preparedness accelerators
As part of its efforts to reach more people with financial wellness in this challenging environment, Fidelity has identified three actions to help retirement plan participants improve preparedness levels, regardless of age or income:
1) Save as much as you can: Aim to save at least 15% of your pre-tax income each year, which includes any employer match. If 15% isn’t possible, get in the habit of increasing your contribution rate by 1% each year until you get to the 15%. By adjusting the savings rate to at least 15%, the retirement score increases 10 points.
2) Examine your asset mix: Make sure you have the right mix of stocks, bonds and cash based on how far you are from retirement, and how comfortable you are taking potential risk in your portfolio. By replacing portfolios appearing to be either too conservative or too aggressive with age-appropriate allocation, the score increases by 2 points.
3) Reevaluate your retirement plan: If you are able to, waiting longer to retire has its advantages, including more time to build savings and increased Social Security payments. For example, claiming Social Security at age 70 instead of age 65 could increase your payments by 43%. By adjusting the expected retirement age past the median reported age of 65 to full benefit age, the score increases 17 points.
Fidelity’s research says if all three actions were applied, America’s total score jumps 30 points, to 108.
“Taking these three actions in tandem can bring America’s retirement score all the way from yellow to dark green,” Assaf said. “However, even taking just one of these actions can significantly improve preparedness. With everyone having unique circumstances though, it’s important to customize what works best for your household.”
The findings in this study are the culmination of a year-long research project that analyzed the overall retirement readiness of American households based on data such as workplace and individual savings accounts, Social Security benefits, pension benefits, inheritances, home equity and business ownership.
See the full report here.
SEE ALSO:
• 401(k) Balances Dropped 20% in 2022 at Fidelity, But Increased in Q4
• This Gen Z Trait Will Disrupt Retirement Industry Most by 2030
• Scary Number of Millennials Say They’ll Cashout 401ks in Market Downturn
• New Tool from Milliman Like a ‘Credit Score for Retirement Readiness’
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
