After being endlessly berated about their profligate lifestyle, it turns out that baby boomers might be better prepared for retirement than predicted. And if anything, Gen-Xers and members of the younger Gen-Y are the ones who are lagging in terms of financial fitness.
Fidelity Investments has come up with a new way to measure how well people will be able to cover their expenses in retirement with its “Retirement Preparedness Measure” (RPM) that assigns a single score to a person’s preparedness. The formula takes age into account which levels the playing field so based upon savings rate, asset allocation and other factors, a 26-year old could end up in the “Very Good” category just as easily as a 56 year old.
A score of 64 or less lands you in “Poor” territory, indicating that you run the risk of not being able to cover even basic retirement expenses such as housing, food, and utilities and will have to significantly reduce your lifestyle. Based on a survey of more than 2,000 working Americans, Fidelity found that 41% of us fall under this category.
Another 14% are in “Fair” shape with a score of between 65-79. Based upon the amount they are currently saving and how it’s invested, this group also will not be able to afford all of their essential retirement needs. While they will have to scale back their plans for retirement, the adjustment will not be as drastic as those who fall in the previous zone.
Unfortunately, more than half of us (55%) are in the red or yellow zones, which indicate we are not on track to be able to cover essential expenses when we retire.
The rest of us fall in one of the two green zones- lighter green for “Good” and dark green for “Very Good.” And most of those individuals are…baby boomers.
“Boomers are in better shape than expected,” says John Sweeney executive vice president of retirement and investing strategies at Fidelity. According to the survey, on average, baby boomers “are on track to reach 81% of their [retirement] goal.”
Whether they learned their lesson when the stock market tanked in 2001, or were just too scared to make a move during the 2008 financial crisis, a significant number of boomers reacted to the most recent downturn by not radically changing the way their assets were invested. And their patience paid off. According to Sweeney, “Boomers who were able to stay the course in 2008-2009 were in a good position when the market recovered.”
Another surprising finding: Given their young age, members of Generation Y are overly conservative in terms of how they are invested. One of the reasons many score in the “red” zone is because they don’t come close to having 90% of their investments in stocks- the amount Fidelity recommends for individuals in their 20s and 30s. “They’ve got 40 years to accumulate wealth,” says Sweeney, “Equities provide the best chance at beating inflation.”
The good news is that no matter your score or age, there are steps you can immediately implement that will improve your financial security in retirement.
While “save more” is probably the first thought that comes to mind, this is actually the second most significant step you can take. According to Fidelity, saving 15% of your (pre-tax) income will boost the score of the average person from 74 to 82, an 11% gain. You don’t have to make the commitment overnight. Start by increasing your 401(k) contribution by 1% to 2% a year. If you’re at 6% today, raise it to 7% or 8% next year. Before you know it, you’ll be at 15%.
Retiring later has the biggest impact on a score. Every year that you continue to work means one more year that you can contribute to your 401(k) or IRA, One less year you have to finance by drawing down your savings and bigger Social Security benefit.
According to Fidelity, by simply planning to work until “full” retirement age (66-67) to become eligible for 100% of Social Security benefits, an average individual (with an RPM score of 74), will move 12%, i.e. from the yellow (Fair) zone to the green (“Good”) zone.
Another good way to increase retirement readiness is to review your asset allocation to make sure it’s appropriate for your age. If you don’t know what that is, find a financial advisor who can help you.
Staying flexible in retirement is key. There will inevitably be times when the markets head south. At that point, you will probably need to scale back on your expenses so you don’t have to withdraw as much from your portfolio. If you are healthy, consider working part-time.
Lastly, keep in mind that you will likely spend as much time in “retirement” as you spent in the workforce. (Most experts recommend planning on 30-35 years.) The difference is that you are solely responsible for the paychecks you will receive. Be prepared for multiple mid-course corrections.