Money Matters: Saving to Bridge the Retirement Gap
The good news and bad news on retirement: Americans are a little better prepared to finance their golden years, but they're still looking at a steep pay cut.
The typical American household is on track to replace 58 percent of its income in retirement, according to a new study by the Fidelity Research Institute. That's a little better than last year's 57 percent. The figure is based on projected income personal savings–including 401(k)'s and individual retirement accounts–Social Security, and pensions.
But at a 58 percent replacement rate, a worker earning $50,000 annually would have only $29,000 a year to live on in retirement.
"We're beginning to see a positive savings trend," says Guy Patton, executive director of the Fidelity Research Institute. Yet "the typical household will face a 42 percent cut at retirement when compared to their preretirement income levels."
To be sure, many workers say they'll require only a fraction of their current salaries to fund a happy retirement. Indeed, half of all workers surveyed recently by the Employee Benefit Research Institute said they would need less than 70 percent of their current salaries once retired.
Yet conventional wisdom among financial planners says you should save enough to generate at least 70 percent of your preretirement income. And a majority of the real experts–people who are actually retired–say they need at least 95 percent of their preretirement income. So the fact that Americans are on track to replace only 58 percent of their paychecks is troublesome.
If there's a silver lining in this, it's that baby boomers–the generation that economists are particularly worried about–are doing better than other age groups. According to Fidelity, the typical boomer (ages 43 to 61) is on track to replace 62 percent of preretirement income. That's significantly better than generation X-ers (ages 25 to 42), who are likely to replace only 54 percent of their paychecks.
Another reason for hope: Workers can improve their situation significantly simply by saving more now. The average baby boomer currently saves only 4.3 percent of annual income, according to Fidelity. But if boomers were to boost that rate to 13 percent, they're likely to replace 85 percent of their annual income.
Among all workers, the current savings rate is just 3.5 percent of income. By boosting that to 12 percent, you could expect to increase your retirement income to 85 percent of your current paycheck, the Fidelity study found.
So the message of this study is clear: If you want to spend more later, you have to save more now.