Who’s Ready Now?

Americans need to tighten their belts or face a thin wallet in retirement.

Lucretia DiSanto Jones, Oct. 2005

Top-notch insurance and financial advisors know if their current clients are ready financially for retirement. What can they expect, however, from the prospects they are wooing?

According to the Fidelity Retirement Index, the typical working American household, whose primary decision makers are age 43 on average, has saved just $18,750 for retirement and is expecting to cover the majority of its retirement expenses through Social Security and pension benefits. By itself, retirement savings may only provide 10 percent to 20 percent income replacement.

Only 15 percent of typical American households are on track to replace 85 percent or more of preretirement income, which is a reasonable estimate for retirement planning.

The Fidelity Retirement Index is a national measure of retirement readiness based on a survey of more than 1,900 American households. The index uses Americans’ broad financial picture, including workplace and individual savings, asset growth, future savings, projected Social Security benefits, pension payments, retirement horizon and expected longevity.

Age matters
When viewed by age group, the index showed that younger working American households, whose primary decision makers are 25 to 40 years old, are typically on track to replace an estimated 55 percent of projected preretirement income when they retire. This compares with 63 percent for working American households whose primary decision makers are preretirees age 55 and older. Overall, the index found that 16 percent of working Americans have not yet started saving for retirement.

Don’t be fooled
Jeffrey R. Carney, president of Fidelity Personal Investments, says that while the data uncovered by the index may seem encouraging, workers are not socking enough away to pay for their golden years. “Americans are relying heavily on Social Security and employer pensions,” he explains, “and are only saving a small percentage of their personal income to fund their retirements. What this means, in effect, is that many Americans will take a significant pay cut in their retirement years, making it difficult for them to adequately prepare financially for rising retiree medical costs and longer anticipated life spans.”

Life stages
The index revealed working American household retirement accumulation and monthly contribution amounts by age group, as well.

• Households of younger adults, ages 25 to 40, have typically saved $9,000 toward retirement and contribute $92 each month to that goal. Twenty-one percent of working younger adults have not yet started to save for retirement.
• Mid-life adults, ages 41 to 54, have saved $30,000 and contribute $187 each month toward retirement. Fourteen percent of working mid-life adults have not yet started saving for retirement.
• Preretirees, 55 and older, have saved $60,000 and contribute $229 each month toward retirement. Eleven percent of these preretirees have not yet started to save for retirement.