More Americans Move into Retirement Savings Green Zone

Americans saving for retirement have steadily improved their retirement readiness score over the last 15 years, but there’s still work to be done, Fidelity Investments reveals in its biennial Retirement Savings Assessment.

According to the study, America’s “retirement score” now stands at 83, meaning the typical household saving for retirement is on track to have about 83% of the income the firm estimates they will need to cover retirement costs – a significant improvement from 2006, when the readiness score was just 62. As a result, the overall retirement score has moved to the so-called green zone for the first time ever.

 

Overall, 37% of households are on target in the dark green zone up from 32% in 2018, meaning they are projected to be able to cover more than 95% of total estimated expenses, while 17% are in the green zone, meaning they can cover from 81% to 95% of their estimated expenses.

Even with this improvement, the study reveals, however, that 28% of those surveyed remain in the red zone, meaning they are projected to cover less than 65% of estimated expenses and significant adjustments to their planned retirement lifestyle will be needed if they don’t address the shortfall.

 

Findings in the study are comprised of an analysis of the overall retirement readiness of American households based on data such as workplace and individual savings accounts, Social Security benefits, pension benefits, inheritances, home equity and business ownership.

 

 

This year, 23% of respondents reported working with a paid professional financial advisor, which is a nudge higher than 2018 levels (22%). For those who do have an advisor, the median retirement score is 89, while for those who do not, the score is 81.

 

Notably, even when controlling for income, advisor users still have a higher retirement score than those without one. For those making under $100,000, the retirement score increases from 80 to 87 with an advisor; for those making over $100,000, the score increases from 83 to 89.  

 

As to the generational differences, Millennials continue to show a commitment to saving, saving at the same rate as Gen Xers, despite being farther from retirement age. In 2020, Millennials have a retirement score of 82 and are in the green zone, as compared to Gen Xers, who are in the yellow zone at 80.

 

 

According to Fidelity, much of the improvement from when the survey was first conducted in 2006 can be attributed to investors saving more and improvements in asset allocations.
The median savings rate has been increasing steadily, currently standing at 10%, which is an improvement over 2018 levels of 8.8% and up significantly from 3.6% in 2006. Boomers saved the most, putting away 11.7% of their salaries, an increase from 9.9% in 2018. Millennials also increased their median savings rate, improving from 7.5% in 2018 to 9.7% in 2020 – which is on par with Gen Xers, who improved from 8.6% in 2018.

 

Additionally, the percentage of respondents allocating their assets in a manner Fidelity considers age appropriate was at 60%, which is a two-percentage point increase from 2018 levels and a notable improvement over 2006 levels, when less than half (48%) allocated their assets in an age-appropriate manner. Not surprisingly, the study notes that one reason is because many workplace retirement plans over the past decade defaulted employees into TDFs and managed accounts.  
Improving Retirement Readiness 

 

In addition to raising savings, reviewing asset mix and adjusting planned retirement ages, Fidelity suggests that strengthening a general understanding of financial basics can help improve retirement scores.

 

As part of the survey, Fidelity asked respondents three questions to test overall financial knowledge, which were related to concepts around simple interest, inflation and equity risk. More than half of respondents (52%) were unable to answer all three questions successfully. Those who did, not surprisingly, tended to have higher retirement scores.
The median retirement score for those who answered all three correctly was 89, marking an 11-point improvement over those who had at least one answer wrong. The median retirement score was lower for those answering all three incorrectly, coming in at 70, five points away from the red zone.  

 

“Although many still have a ways to go, the good news is that for the average saver – regardless of age or income level – these findings suggest there’s a positive impact to knowing where you stand and then taking appropriate action to get on a path to even greater retirement readiness,” notes Melissa Ridolfi, vice president of retirement and college leadership at Fidelity Investments. 

 

Data for the study was collected by Ipsos Public Affairs, LLC through a national online survey of 3,234 working households earning at least $20,000 annually with respondents age 25 to 74, from Aug. 14 through Sept. 11, 2019.