Popular financial advice often suggests that households should aim to replace between 65 and 85 percent of pre-retirement income in retirement in order to maintain their pre-retirement living standards.
Some households can achieve replacement rates that are in the recommended range through Social Security and pension income alone. Others can reach these replacement rates with the addition of income from part-time work during retirement, housing equity and inheritances.
But most households will need to rely on their savings to supplement their other retirement income. Yet, reports in the popular press often warn that Americans are not saving enough for retirement.
Surveys that ask people about their retirement preparedness yield mixed results. For example, one recent survey by the Academy of Actuaries found that nearly two-thirds of working Americans feel confident that they will live comfortably in retirement and almost three-quarters have started saving for retirement. However, the same survey also found that over half of workers feel they are behind schedule for planning and saving for retirement. Workers who have done a â€œretirement needs calculationâ€ are more likely to be confident that they will live comfortably in retirement and are less likely to feel that they are behind schedule for planning and saving for retirement. However, more than one-half of workers have yet to determine how much retirement savings they will need.
Many studies suggest that Americans nearing retirement need additional savings to allow them to maintain their current living standards in retirement. However, these studies may exaggerate the extent to which households have inadequate retirement savings. In particular, these studies exhibit one or more of the following limitations: ignoring housing equity, ignoring other sources of income that can be used to finance consumption during retirement, and disregarding continued saving prior to retirement.
In addition, when researchers estimate how much saving individuals will need â€“ measured in terms of wealth as a share of earnings â€“ these savings targets are often interpreted as minimum requirements, thereby ignoring that current earnings may not accurately reflect average lifetime earnings. This possibility requires that, rather than a single savings target, researchers consider an alternative measure of savings adequacy that incorporates a distribution of targets that could allow households to maintain their pre-retirement living standards in retirement.
When all of these considerations are taken into account, preliminary evidence suggests that saving may be adequate for a majority of households. Even so, there is some evidence of under saving among the 5 to 25% of households with the lowest wealth-to-earnings ratios.
Although many workers feel they are behind schedule for planning and saving for retirement, adopting a broader interpretation of savings targets suggests that a majority of households will have sufficient resources for retirement. However, with the potential of a decrease in future Social Security benefits and the shift in private pensions from defined benefit to defined contribution plans, future retirees may need to rely more heavily on household savings to fund their retirement years. Therefore, it will be important to continue monitoring savings behavior to assess whether it is adequate to meet future retirement needs.
The amount of your Social Security payments is determined, in part, by your age when you retire. You will receive reduced payments if you retire early and increased payments if you wait until after your normal retirement age. However, only 1 in 6 Americans waits until age 65 to retire. Add continuing advances in medical treatment, health care and nutrition, and you could end up living many more years in retirement than you saved for.
Plan for the best scenario and add five or ten yearsâ€™ life expectancy to whatever projection you make â€“ and then fill out our contact form to have a professional plan created for you to ensure you are protected in your â€œgolden yearsâ€.
For more information, please call us at 1.800.508.1144.