American savers have steadily improved their retirement preparedness, with America’s retirement score at an all-time high of 80.
It means the typical saver is on target to have 80 percent of the estimated income estimates they will need to cover retirement costs, according to Fidelity Investments.
It’s a significant improvement from when the study was first conducted in 2005 when the score was 62, according to the Boston-based firm.
However, even with this improvement, the study reveals half of those surveyed are at risk of not being able to fully cover essential expenses in retirement.
Millennials appear to be making the greatest strides in getting to the “green zone,” meaning most savers will be on track to cover essential expenses in retirement.
“Millennials are clearly putting money aside for retirement and taking more control of their personal situations to ensure a financially-secure future,” Ken Hevert, senior vice president of Retirement at Fidelity, said in a statement. “While younger generations typically don’t have jobs with access to pensions as a source of guaranteed retirement income, there are many actions that can be taken to improve retirement readiness, including saving more, managing debt and making smart investment decisions.”
What’s driving the behavior?
- Investors are saving more. Contrary to recent Commerce Department data, Fidelity claims the improvement is driven largely by a higher median savings rate: now at 8.8 percent, up significantly from 3.6 percent in 2006. Boomers saved the most, stashing away 9.9 percent of their salaries, an increase from 9.7 percent in 2016. Millennials held steady at 7.5 percent. Despite this, both are well below Fidelity’s suggested total savings rate of at least 15 percent, including employer contributions.
- But, asset allocation still needs work. The percentage of respondents allocating their assets in a manner Fidelity considers age appropriate held fairly steady at 55 percent, compared to 57 percent in 2016. This is, however, a notable improvement over 2006 levels, when less than half—48 percent—allocated their assets in an age-appropriate manner. One reason: this past decade, many workplace retirement plans have begun defaulting employees into target-date funds and managed accounts.
Fidelity also points to the issue of health care expenses in retirement planning, noting that the growing popularity of tax-advantaged health savings accounts (HSA) has become one solution “poised to meet this need, for those who have it available as an option.”
Respondents who report having HSAs tend to have higher Retirement Scores: households with an HSA have a score of 84; those without have a score of 79.
“Although this does not provide definitive proof of a causal relationship between having an HSA and one’s Retirement Score, the evidence strongly suggests taking advantage of this savings vehicle, if you have access to one, is good for your overall financial position and indicative of good savings habits, regardless of income level,” the company concludes.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
