When it comes to retirement savings, American workers have a lot of work to do. A recent Survey Insured Pension Institute found that workers between the ages of 40 and 73 do not have enough retirement savings to meet their income needs, and that they are not saving enough to catch up. The online survey, which surveyed 990 workers in March 2021, sheds new light on the lagging savings rate, unrealistic retirement income expectations and a widespread lack of basic retirement planning.
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Savings interest falls short
There are two fundamental factors that lead to the retirement savings deficit in America.
First, not enough people are actively saving for retirement. One in four employees surveyed has no savings at all, confirming an identical finding of a recent PwC survey.
Second, those who put money aside for retirement simply don’t save enough. The IRI survey found that 51% of employees surveyed have less than $50,000 in savings, while only 20% have more than $500,000. Only 8% have saved $1 million.
The IRI survey also asked how much of their salaries employees are saving for retirement. While 57% save less than 10% of their income, a full third of respondents said they save less than 5%, well below the 10% to 15% that experts recommend people to save.
“Among savers, savings rates are not nearly high enough for even the youngest respondents to grow their nest eggs to a level sufficient to meet their income and budget expectations,” the study said. “With 60% of respondents reporting an annual household income of less than $100,000 and more than half saving less than 10% of their income, the prospects for a secure retirement look dim.”
Unrealistic Income Expectations
The IRI survey also found that unrealistic expectations for retirement income are ubiquitous among workers over the age of 40. Despite a general lack of confidence in having adequate retirement income (only 44% said they are confident), many employees have aggressive expectations of retirement income. In fact, 58% of respondents believe they need at least $55,000 in annual retirement income, including 35% who say they need at least $75,000.
“A remarkably high percentage of employees expect to need an annual retirement income of more than $75,000 in current dollars,” the study said. “This is remarkable because, as shown previously, they are not saving, and have not yet saved enough to meet that expectation.”
Not enough plans
One of the most glaring findings of the IRI survey was a widespread lack of retirement planning. Only four in ten respondents said they have tried to calculate how much they need to meet their retirement income expectations. In fact, only 36% of respondents aged between 62 and 66 have attempted to calculate this number.
“Maybe some have a pension. And some may think that they will work well past retirement age or that they will continue to earn income into retirement,” the study concluded. “But for those without these plans, understanding how much income savings are can yield.”
What else can you do?
Perhaps the most direct and simple answer to the question of how to improve your retirement prospects is to save earlier in your career. In fact, 67% of survey participants said they regret not starting saving sooner, making it the No. 1 people regret.
Saving for retirement earlier in your career can have a big impact on future savings. Consider the difference in retirement savings between a 25-year-old making $50,000 a year and a 50-year-old making $100,000. Both workers save 10% of their annual income in their 401(k), but the younger worker has much more time to build their nest egg.
Even if the older worker has already saved $50,000 for retirement by the time he turns 50, his 401(k) will be worth just over $400,000 when he turns 65. The 25-year-old, on the other hand, has twice as much time to accumulate their contributions and earn compound interest. The 25-year-old’s 401(k) will be worth more than $1.1 million by age 65, highlighting the importance of time in the market. (Many retirement planners suggest that the typical 401(k) portfolio is a average annual return of 5% to 8%, so both scenarios assume an annual return of 6.5%.)
Contribution amount: 10%
Existing Retirement Savings: $0
Retirement Savings at 65: $1,134,226
Contribution amount: 10%
Existing Retirement Savings: $50,000
Retirement Savings at 65: $401,030
On the other hand, if saving earlier in your career isn’t an option, extending your career could be one. About 30% of survey respondents said they think they will retire before they reach age 65, but working into their late 60s can help supplement your retirement savings. Delay Social Security for several additional years may also be a viable option. This will increase your annual benefit, although you must do your own break-even analysis to determine the optimal time to claim Social Security based on your life expectancy.
For those who have never tried to calculate how much to save for retirement, SmartAsset is free Pension calculator is a good place to start. This tool examines your age, monthly savings, where you live, Social Security election age, and other factors to determine how much you need. Try it now.
When it comes to planning for retirement, a large percentage of American workers who are at least 40 years old seem to need help. According to an IRI survey conducted earlier this year, one in four employees has absolutely nothing saved for retirement and only 40% of people have actually tried to calculate how much they need. Saving at the start of the career clearly has added value, as can be seen from the comparison of the 25-year-old and the 50-year-old.
Retirement Planning Tips
AN Financial Advisor can help you plan your retirement and find out what your income needs will be. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches for free to decide which one is best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
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