Scary Retirement Numbers--No Matter How You Calculate Them

The average baby boomer will fall far short on their necessary retirement income.

About 44% short.

That’s the grim prediction in a new study by Fidelity Investments which looked at average amounts saved, projected Social Security benefits, home equity and other factors across three demographic groups: baby boomers, Gen-Xers, and Generation Y (aka echo boomers).

Like the massive RETIRE Project Georgia State University conducted for decades, the Fidelity study assumes that because some expenses decline once you retire, you don’t need as much income to maintain your standard of living.

But that’s about where the similarity ends.

While the GSU study(1) estimates that an individual earning $50,000 to $90,000 per year needs to replace 80% of that amount the first year of retirement in order to maintain their standard of living, this amount includes the taxes you’ll still have to pay on some of your income/ On the other hand, the Fidelity study also assumes you’ll need 80% of your pre-retirement income, but on an after-tax basis.(2) As a result, the before-tax income you will need will actually be 25% higher than the monthly amount cited.

Numbers Don’t Lie. Humans Do

Another potential flaw in the Fidelity “Retirement Savings Assessment” study is that it relied on self-reported data, which can be less than accurate compared to independent sources for income and account balances. For instance, the “average” Gen-X worker was found to have a median age of 37 and a current income of $72,000 before taxes. The “average” baby boomer- age 55- reported annual earnings of $74,000- just $2,000 a year higher. It seems a bit improbable that a 55 year old would only have a $2,000 income edge over someone 20 years younger.

Finally, while the survey included roughly 3,000 individuals ages 25 to 85, it was conducted entirely online, which naturally eliminates individuals who do not have access to a computer or wish to take the time to fill out an extensive survey.

The Shocking Shortfall…

Nonetheless, based on the self-reported information, Fidelity estimates the “average” baby boomer will need after-tax income of $4,800a month starting at age 67, (the year after reaching the Social Security “full retirement age” of 66) and will live to be 92. Income from Social Security, pensions and withdrawals from investments is projected to make up $2,700 of this amount. That leaves an "estimated" monthly income gap of $2,100, which translates into a shortfall of 44%. Again, however, because these are after-tax numbers, the shortfall amount is actually larger on a pre-tax basis.

Gen-Xers, who supposedly earn nearly as much as boomers and who have 30 years (as opposed to 10) for their retirement savings to grow, are projected to have an after-tax shortfall of $1,700a month.

Steps to Close the Gap

The most valuable contribution Fidelity’s study makes is that it provides concrete actions you can take to reduce your retirement income gap, regardless of its size. Moreover, it calculates the dollar impact of each one. Such as:

1. Adjust Your Asset Allocation. According to Fidelity, even younger investors need to shift more of their investments into stocks, which have the potential for greater return, albeit with added risk.(3) The younger you are, the bigger the impact this will have, since there is more time for your portfolio to benefit from higher potential returns, as well as more time to recover from any market declines.

However, given the fact that most households have less than $100,000 in retirement savings, a study by the Center for Retirement Research at Boston College concluded that “for the typical household, asset allocation was unimportant.” You gain a lot more by working a few years longer.(4) (See No.3 below.)

2. Save More. Most people aren’t taking full advantage of the retirement plan offered through their job, which is potentially a two-fold loss. First, your contributions grow on a tax-deferred basis, and  second, if your employer matches what you put in, you may be leaving money on the table.

Fidelity calculates that the “average” 55-year old “could add $425a month to his retirement income” by increasing his 401(k) contribution 1% a year from 5% to 10% over four years. (This assumes a 3% company match and a hypothetical return of 7.5%)

According to the Brookings Institution, “nearly half of all workers do not have access to an employer-sponsored retirement plan.” In that case, create your own by contributing to an IRA.

2a. Do Both #1 & #2.

3. Postpone Your Retirement Date and/or Work Part-time in Retirement. Fidelity calculates that it’s “average” Baby Boomer would see a $500 increase in her monthly retirement income if she retired at 68 instead of 66. A major factor is a significant jump in the size of her Social Security check.

The Center for Retirement Research has long advocated working a few years longer than planned to “substantially reduce” the number of households that would fall short of meeting their retirement income replacement rate.

4. Annuitize a Portion of Your Savings. Most of use underestimate how long we’re likely to live, which means we could run out of money well before we run out of life. Although you lose access to the money used to buy a fixed annuity, in the long run, Fidelity concludes that its typical Gen-Xer and baby boomer “would be better off… as long as they live beyond their mid-80s.”

Based on the 2010 Census, the Society of Actuaries estimates that in the case of a married couple where both individuals are age 65 today, there is a 31% probability one will live to at least age 95!

5. Downsize Your Home: Unless you live in California, Colorado, Nevada, Florida, or somewhere else that was particularly hard hit by the real estate decline, there’s a good chance you’ve built up equity in your personal residence. Fidelity suggests selling it and using 75% of the proceeds to buy a smaller, less expensive home. Invest the remaining 25%.

Since few--if any--of us fit the profile of the “average” individual this study is based on, I recommend finding an experienced financial advisor who can help you evaluate the steps most appropriate for you to take to accumulate the retirement stash you’re going to need. Make sure this individual is also equipped to provide guidance on how to draw down your assets so they last as long as your retirement. Behavioral finance has consistently shown we are our own worst enemies when it comes to managing our money. Emotions invariably get in the way. One of the biggest services a professional advisor can provide is to stop you from making a stupid mistake you’re going to regret later.

1. After computing retirement income replacement rates for more than 20 years, the GSU Center for Risk Management last did so in 2008.

2. The Fidelity Retirement Savings Assessment assumes “an aggregate effective tax rate of 20% (encompassing federal, state, and local taxes).”

3. A mix of 83% stocks (foreign and domestic) and 17% bonds is assumed to return 8.35%.

4. “How Important is Asset Allocation to Financial Security in Retirement?,” CRR WP 2012-13.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

If you have a question for Gail Buckner and the Your $ Matters column, send them to:, along with your name and phone number.