In 2015, 45% of Americans were saving more and investing more appropriately for their age — and thus improving their retirement prospects — up from 38% of savers and investors in 2013, according to Fidelity Investments’ biennial Retirement Savings Assessment study released Thursday.
However, this means that 55% of households were at risk of not being able to completely cover food, housing and health care expenses in retirement.
Strategic Advisers, a Fidelity company and RIA, conducted research for this study, based on data collected through a national online survey in August of 4,650 working households earning at least $20,000 annually with respondents age 25 to 75. All respondents expected to retire at some point, and had already started saving for retirement.
Researchers used Fidelity’s proprietary retirement preparedness measure (RPM) to score each household’s ability to cover estimated expenses in retirement.
Respondent households fell into one of four color-coded categories on the retirement preparedness spectrum, with dark green (>95) representing “on track,” green (81–95) “good,” yellow (65–80) “fair” and red (<65) “needs attention.”
The RPM also provides a view of preparedness across generations.
Tending Toward Green
In the new study, America’s median retirement score is a yellow zone 76, indicating that many households will fall short of completely covering estimated essential retirement expenses.
This may require sacrifices such as spending cuts in retirement that could diminish their quality of life, especially in a severe market downturn.
Fidelity noted, however, that collectively, Americans were now only four percentage points away from moving into the green zone, a significant improvement from 2013, when the score was 69.
Across-the-board progress in savings and how investments are being allocated largely account for this improvement, according to the report.
Americans’ median savings rate jumped from 7.3% in 2013 to 8.5% last year. Millennials showed the greatest improvement, increasing from 5.8% to 7.5%, and boomers saved the most, 9.7% of their salaries, up from 8.1%.
Still, these figures were below what Fidelity said was its recommended total savings rate of at least 15%, which assumes no pension income.
On the investment front, 62% of respondents in 2015 had allocated their assets in a manner that Fidelity considered age appropriate, compared with 56% in 2013.
“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,” John Sweeney, Fidelity’s executive vice president of retirement and investment strategies, said in a statement.
“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.”
The study compared each generation’s preparedness for retirement. Boomers scored 82: in good shape, but with little time to move into the dark green zone.
Fidelity said their most powerful step would be to consider working longer.
Gen Xers scored 73. They still have at least 15 years to get into the green zone. They should increase savings and consider working longer, Fidelity said.
Millennials scored 70, moving out of the red zone where their score was 61 in 2013. With time on their side, their most powerful step is to increase savings, according to Fidelity.
Arriving at Green
Fidelity said many people may be unsure where to start planning for retirement or worry that their personal retirement income goal may be unattainable.
It recommended three “accelerators” that could have a positive effect on retirement readiness.
First, setting an annual goal of saving 15% or more of income, including any employer match, can make a big difference.
“Saving at this level pays off: by adjusting the savings rate to at least 15%, the median RPM score of 76 increases to 84.”
Second, reviewing asset mix can help build the potential for long-term growth in the portfolio through investment choices and exposure to various asset classes that can provide growth and outpace inflation, while also limiting downside risk.
“By replacing portfolios that appear to be either too conservative or too aggressive with an age-appropriate allocation, the median RPM score of 76 increases to 78.”
Third, retiring at full retirement age can increase monthly Social Security income by 30%.
“By adjusting the expected retirement age slightly, from the median reported retirement age of 65 to between 66 and 67, the median RPM score of 76 increases to 86.”
“Our analysis shows that using these three ‘accelerators’ — either individually or in combination — can have a substantial impact on retirement readiness,” Sweeney said.
“In fact, when all three are applied, America’s retirement score jumps all the way to 100, putting many more individuals in a better financial position to truly enjoy their retirement years.”
— Check out 401(k)s Keep Getting Cheaper on ThinkAdvisor.