You Need More Than You Think
Most Americans underestimate how much they need for retirement but recent data show that more Americans are setting themselves up for financial success in retirement. Average 401(k) balances reached $126,083 in the third quarter of 2021—4% higher than the fourth quarter of 2020. To put that in perspective, in 2010 the average balance was $69,700. Americans have nearly doubled their 401(k) balance in the past decade. In another round of positive news, the number of 401(k) loans and withdrawals dropped a bit in the first quarter of 2021, to 17.5% from 19.7% a year ago. Finally, employee savings rates for 401(k) funds reached record heights at 9.1%, combined with employer contributions for a total savings rate of 13.5%. All of these numbers are great to see but that doesn’t mean Americans as a whole are in great financial shape when it comes to retirement savings. In January 2020, 36% of Americans thought their retirement savings were in good shape, but 25% of adults had no savings at all. Even baby boomers, the generation closest to retirement, only had an average of $120,000 saved, barely enough to provide $1,000 a month for fifteen years. The increase in retirement savings from 2020 to 2021 is not enough to make up for this deficit, especially as the increase in savings is mostly due to newer members of the workforce saving at higher rates in their early careers than previous generations did.
Does Anybody Really Know?
Here comes the problem. Despite the dire warnings that come from the financial community, it’s hard for the average American to know how much they should save. A quick Google search reveals pages of retirement calculators but some are too complicated for the average American with little financial knowledge to use while others give widely different results. Some will tell you you’re on the right track while others will suggest a savings strategy unrealistic for most middle-income families.
The Financial Readiness Score
Enter Fidelity, the company that holds $11.1 trillion in customer money and helps more than 40 million people invest. Using the treasure trove of data they produce from having so much money invested and so many customers, the company created the financial readiness score (click the link to find your score). If you’re not already a Fidelity customer (or you are, but don’t want to find your login information), click the link, “Not a Fidelity customer? Get your retirement score.” Next, answer a few simple questions including your age, annual income, your current retirement savings, your monthly savings, and a few others. At the end, you’ll see a score with an easy-to-understand graph showing you where you are in your journey. Use the boxes at the top and bottom of the screen to play with the numbers to see how you can raise your score. Fidelity mentions that the score is calculated assuming an underperforming market—a responsible strategy to make you rely less on the market and a little more on your ability to save but because the model is conservative.
Raising Your Score
The hardest action is also the most effective—save more. The more you save and the earlier you start, the more you’ll have when you retire. And too many people have picked investments in their 401(k) that don’t line up with their risk tolerance or time horizon, and/or are too expensive. In general, the younger you are, the more aggressive your investment choices should be. If you’re a 20-, 30-, or 40-something, your stock allocation should be quite high because you’re far enough away from retirement that you can weather any temporary downturn in the financial markets. Speaking of downturns, there’s little doubt that you’ll experience a rough patch in the markets before you retire. Don’t panic. Keep your money invested and ride it out. During the recent Great Recession, retirees pulled their money and didn’t reinvest until much too late causing them to lose out essential gains. Finally, your retirement savings is something you can’t afford to get wrong. Ask for help. Most companies offer free help with their 401(k) plan and as you age and your financial landscape get more complicated, having a personal financial adviser becomes a must.
