America's Retirement IQ

Are Americans in good shape or bad shape when it comes to retirement? It depends on which research report you read. According to a retirement savings analysis from Fidelity Investments, the 2014 year-end average 401(k) balance was $91,300, a record high and up two percent from 2013. The news was even better for employees who have maintained a 401(k) plan for 10 years or more -- the average balance was $248,000, up 11 percent year-over-year.

Perhaps the most encouraging data point from the Fidelity report is that the average savings rate increased to 8.1 percent, the highest since year-end 2011. When combined with employer contributions, the average employee savings rate was 12.2 percent of his or her salary in 2014.

While Americans have saved $24 trillion in retirement assets, according to the Investment Company Institute, many individuals have not saved enough and millions have no retirement savings or pension at all. In fact, the National Institute on Retirement Security (NIRS) found that when all households are included— not just those with retirement accounts — “the average working household has virtually no retirement savings—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.” The NIRS report is important because it shows that some 45 percent, or 38 million working-age households, do not have any retirement account assets at all.

There is also a disconnect between knowing that you have to save prior to retirement and the important information that is necessary once you actually retire. In a recent survey by The American College of Financial Services, only 20 percent of Americans aged 65 to 75 with at least $100,000 in assets were able to pass a basic quiz on the steps they need to take to secure their finances after retirement.

In other words, Americans' retirement income IQ is not where it needs to be. Among some of the findings that are worrisome to financial planners:

• Over half of the respondents underestimate life expectancy (76.2 for men and 81 for women, according to the CDC), which means that they probably don’t realize how long their retirement nest eggs need to last.
• The lack of basic understanding of the Social Security system. Just 54 percent realize that Social Security retirement benefits increase each year that a worker delays to claim until age 70. Although the survey did not ask about whether respondents understood that claiming benefits before reaching full retirement age would reduce benefits, my guess is that most aren’t aware that claiming early could result in a reduction of as much as 30 percent for the worker as well as a non-working spouse who is relying on the working spouse’s SS retirement benefit.
• Only 30 percent understand that lifetime SS benefits can increase more by working two years longer or by deferring for two years than by increasing contributions just prior to retirement. (The Social Security Administration provides an easy to use free calculator that shows the effect of early or delayed retirement. For those seeking more customized SS advice, including when to claim benefits, you can pay Social Security Solutions a nominal fee of $20 to $250 to help make what for some may be the largest financial decision of their lives.)
• Respondents were either unaware of or overly ambitious when it comes to a “withdrawal rate,” which the percentage that retirees can safely withdraw from their assets annually without depleting their nest eggs. Most financial planners suggest 3 to 4 percent as a baseline, which means that for every $1,000,000 in assets, you can safely withdraw $30,000 to $40,000 per year.

Here’s the kicker of the survey: “Despite the failing grades, many Americans are confident about their post-retirement income. More than half of those surveyed consider themselves well-prepared to meet their income needs in retirement, and 91 percent are at least moderately confident in their ability to achieve a secure retirement.”