Many Americans have steadily been improving their retirement readiness over the past 15 years to the point where they have 83% of the income they will need over the course of their expected retirement years, according to Fidelity Investments’ biennial Retirement Savings Assessment.
As a result, America’s retirement score has moved to green at 83, a significant increase from the first study conducted in 2006 when the score (then known as the “retirement readiness index”) was at 62, placing the median American household deep in the red, Fidelity noted.
Fidelity attributes much of the improvement over the course of 15 years to investors ramping up their savings. The median savings rate, which has been steadily increasing, stands at 10%, an improvement over 2018 levels of 8.8% and up significantly from 3.6% in 2006, the data showed.
Asset allocation is another key reason for the improvement, Fidelity said. It noted the percentage of respondents allocating their assets in an age-appropriate manner was at 60%, which is a two percentage point increase from 2018 and a notable improvement over 2006 levels, when 48% allocated their assets in an age-appropriate manner. This, Fidelity said, can be attributed to the fact that in the past decade many workplace retirement plans have begun defaulting employees into target-date funds and managed accounts.
As for the different age cohorts, baby boomers saved the most by stashing away 11.7% of their salaries, an increase from 9.9% in 2018. Millennials increased their median savings rate from 7.5% in 2018 to 9.7% in 2020, a level that is now on par with Generation X, which jumped from 8.6% in 2018. Despite these increase, Fidelity said all savings levels are still well below Fidelity’s suggested total savings rate of at least 15%, which includes employer contributions.
Despite the improvement, the study revealed 28% of those surveyed are in the red, meaning significant adjustments to their planned retirement lifestyle are likely if they don’t take action to make up the shortfall.
Fidelity explained it uses data from more than 3,200 survey responses that are run through the daily retirement planning platform it uses with customers. The end result is a score indicator showing whether savers are on target to meet estimated income needs. The score places households into four categories (linked to a numerical range or percentage) on the retirement preparedness spectrum, based on a household’s ability to cover their estimated retirement expenses in a down market.
According to the data, 37% of households are able to cover upwards of 95% of total estimated expenses, which includes essential and discretionary expenses; 17% are able to cover at least essential expenses, but not discretionary expenses such as travel, entertainment, etc.; and 18% are likely to require modest adjustments to their retirement lifestyle.
In line with the findings, Fidelity suggests investors take actions such as raising savings, reviewing asset mix and revisiting their retirement plan to gain better control over their financial future and boost their retirement preparedness.