What's a Retirement Readiness Score?

How Prepared Are You for Retirement?

Aside from taking care of current everyday expenses, the most important financial objective you should have is saving and investing for the future when you’re unable to produce income by working. Ironically, measuring your progress in this area is surprisingly hard. Wouldn’t it be nice if you could take a test and get a retirement readiness score? Good news. Thanks to Fidelity, you can!

You Need More Than You Think

Most Americans underestimate how much they need for retirement but recent data show that more Americans are setting themselves up for financial success in retirement. Average 401(k) balances reached $104,000 in the second quarter of 2018—just below the all-time high of $104,300 in the last quarter of 2017. To put that in perspective, in the second quarter of 2014, the average balance was $80,800. Americans have increased their 401(k) balance by nearly 29 percent in only 5 years.

In another round of positive news, 401(k) loans hit the lowest level since 2009. As of 2018, 20.5 percent of workers have a 401(k) loan, the lowest percentage since 2009 when it was 19.9 percent. Finally, the default savings rate, the percentage of funds automatically deducted to fund a 401(k), rose to 3.9 percent.

All of these numbers are great to see but that doesn’t mean Americans as a whole are in great financial shape when it comes to retirement savings. Despite over half of Americans believing they’re in a good financial spot when it comes to retirement, more than one-third have less than $5,000 saved and one-fifth have no savings at all. Even among the baby boomers, the generation that is the closest to retirement, one-third have a balance of $25,000 or lower.

Does Anybody Really Know?

Here comes the problem. Despite the dire warnings that come from the financial community, it’s hard for the average American to know how much they should save. A quick Google search reveals pages of retirement calculators but some are too complicated for the average American with little financial knowledge to use while others give widely different results. Some will tell you you’re on the right track while others will suggest a savings strategy unrealistic for most middle-income families.

The Financial Readiness Score

Enter Fidelity, the company that holds $7.2 trillion in customer money and helps more than 27 million people invest. Using the treasure trove of data they produce from having so much money invested and so many customers, the company created the financial readiness score (click the link to find your score). If you’re not already a fidelity customer, or you are but don’t want to find your login information, click the link at the top of page that says, “Not a Fidelity customer? Get your retirement score.”

Next, answer a few simple questions including your age, annual income, your current retirement savings, your monthly savings, and a few others. At the end, you’ll see a score with an easy to understand graph showing you where you are in your journey. Use the boxes at the top and bottom of the screen to play with the numbers to see how you can raise your score.

Fidelity mentions that the score is calculated assuming an underperforming market—a responsible strategy to make you rely less on the market and a little more on your ability to save but because the model is conservative, your actual score is probably a little higher than what Fidelity is reporting.

How Can I Raise my Score?

The hardest action is also the most effective—save more. The more you save and the earlier you start, the more you’ll have when you retire. Second, too many people have picked investments in their 401(k) that are too conservative and/or too expensive. In general, the younger you are, the more aggressive your investment choices should be. If you’re a 20, 30, or 40-something, your stock allocation should be quite high because you’re far enough away from retirement that you can weather any temporary downturn in the financial markets.

Speaking of downturns, there’s little doubt that you’ll experience a rough patch in the markets before you retire. Don’t panic. Keep your money invested and ride it out. During the recent Great Recession, retirees pulled their money and didn’t reinvest until much too late causing them to lose out essential gains.

Finally, your retirement savings is something you can’t afford to get wrong. Ask for help. Most companies offer free help with their 401(k) plan and as you age and your financial landscape gets more complicated, having a personal financial adviser becomes a must.