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 $121,500 in the fourth quarter of 2020—11% higher than the previous quarter and 8% higher than the previous year. To put that in perspective, in 2010 the average balance was $69,700. Americans have increased their 401(k) balance by 57% in the past decade.
In another round of positive news, the number of 401(k) loans and withdrawals dropped a bit in the first quarter of 2021, to 17.5% from 19.7% a year ago. Finally, employee savings rates for 401(k) funds reached record heights at 9.1%, combined with employer contributions for a total savings rate of 13.5%.
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. As of January 2020, despite 36% of Americans thinking they’re in a good financial spot when it comes to retirement, 25% of adults have no savings at all. Even among the baby boomers, the generation that is the closest to retirement, only has an average of $120,000 saved, barely enough to provide $1,000 a month for fifteen years.
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 $10.4 trillion in customer money and helps more than 37 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, “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.
Raising Your 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 get more complicated, having a personal financial adviser becomes a must.