By Tim Parker
You Need More Than You Think
Most Americans underestimate their retirement needs, but recent data suggests that more Americans are securing their financial future during retirement. The average balance of 401(k) accounts reached $126,083 in the third quarter of 2021, which is a 4% increase from the fourth quarter of 2020. For comparison, the average in 2010 was $69,700. The current average for 401(k) accounts has nearly doubled over the past decade.
In another round of positive news, the number of loans and withdrawals from 401(k) accounts decreased slightly in the first quarter of 2021, from 19.7% last year to 17.5%. The savings rates for 401(k) plans reached a record high of 9.1%, along with employer contributions, making the total savings rate 13.5%.
All of these numbers look good on paper, but that doesn’t mean that Americans, in general, are in great financial shape when it comes to retirement saving. In January 2020, 36% of Americans believed their retirement savings were in good shape, but 25% of adults have no savings at all. Even baby boomers, the generation closest to retirement, have an average savings of only $120,000, which is barely enough to provide $1,000 a month for fifteen years.
The increase in retirement savings from 2020 to 2021 is not enough to close this gap, especially since the rise in savings is largely due to new members of the workforce saving at higher rates early in their careers compared to previous generations.
Does Anyone Really Know?
Herein lies the problem. Despite the stark warnings from the financial community, it is difficult for the average American to know how much they should save. A quick Google search reveals pages filled with retirement calculators, but some are overly complicated for the average American with little financial knowledge to use, while others provide significantly differing results. Some may tell you that you are on the right track while others may suggest an unrealistic saving strategy for most middle-income families.
Financial Retirement Readiness Index
Enter Fidelity, the firm that holds $11.1 trillion in client assets and helps more than 40 million people invest. Using the vast amount of data it produces from having so much invested money and many clients, the company has created a Financial Retirement Readiness Index (click the link to see your score). If you are not already a Fidelity client (or if you are, but don’t want to dig up your login information), click on the link “Not a Fidelity client? Get your retirement score.”
Next, answer a few simple questions including your age, annual income, current retirement savings, monthly savings, and a few other questions. At the end, you will see a score with an easy-to-understand chart showing you where you stand on your journey. Use the sliders at the top and bottom of the screen to play with the numbers and see how you can raise your score.
Fidelity reminds you that the score is calculated based on an underperforming market assumption – a responsible strategy to make you rely less on the market and more on your ability to save, but because the model is conservative.
Raising Your Score
The hardest action is also the most effective – saving more. The more you save and the earlier you start, the greater your savings will be at retirement.
There are many individuals who have chosen investments in their 401(k) accounts that do not match their risk tolerance or time horizon, and/or are too expensive. Generally, the younger you are, the more aggressive investment options you should take. If you are in your twenties, thirties, or forties, your stock allocation should be high enough because you are far enough from retirement to weather any temporary dips in the financial markets.
Speaking of
Regarding downturns, there is no doubt that you will face a tough period in the markets before retirement. Do not panic. Continue to invest your money and hold on. During the last great economic recession, retirees withdrew their funds and did not reinvest until very late, resulting in significant loss of gains.
Finally, you cannot afford to make a mistake with your retirement savings. Seek help. Most companies offer free assistance with their retirement plans, and as you age and your financial landscape becomes more complex, having a personal financial advisor becomes a necessity.
Source: https://www.thebalancemoney.com/what-s-a-retirement-readiness-score-4174496
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