Americans seem curiously confident that the cash they've squirreled away for retirement is sufficient.
Well, perhaps they shouldn't be.
According to a Pew Research Center survey in August, while two-thirds of middle-class Americans are satisfied they've saved enough for their golden years, the opposite is true for most people.
Fidelity Investments, the nation's largest 401(k) administrator, reports that the average balance in its retirement plans was $72,800 at the end of June. If you expect to retire at 65 and live another 20 or 30 years, that amount won't get you far. It's no wonder that, according to the National Bureau of Economic Research, almost half of Americans are dying with less than $10,000 to their names.
So, if the math doesn't add up, why are Americans so satisfied about their seemingly modest savings?
"Retirement saving is one of the hardest things that humans have to do, in terms of our thinking," says Dan Ariely, a behavioral economist at Duke University and author of books like Predictably Irrational. "When you're saving for something in the future, 30 or 40 years from now, you really have no clue about what you'll be getting. So it's no surprise that it's something most people can't do very well."
In short, present needs take precedence. Why save for the future when you can have immediate gratification now? It's pretty much like that famous Stanford University psychological experiment that tempted kids with the choice of one marshmallow immediately, or two marshmallows later.
In truth, the math isn't that difficult to figure out, but the goal seems impossible to achieve if one falls too far behind. That's why Boston-based Fidelity Investments has produced a new tool which suggests age-based yardsticks for how far along you should be in your savings.
A 40-year-old, for instance, should have around two times his or her annual salary. A 45-year-old should have three times his or her salary in savings; a 50-year-old, four times; and so on, with the goal of having at least eight times your annual salary (ideally more) socked away by the time you retire.
That final target suggests that someone making $80,000 a year should have $640,000 saved for retirement, supplemented by other sources like Social Security. That yields enough cash to live on about 85 percent of their former salary, Fidelity estimates.
"Our hope is that these incremental milestones will make saving seem more feasible," says Beth McHugh, vice president of Thought Leadership at Boston-based Fidelity. "You're better off knowing at 45 if you're looking at a shortfall, because at least you have some time to make it up."
Of course, there's no single all-encompassing answer about how much retirement saving will be enough. It depends on location, lifestyle and expenses, among other things.
And even financial pros differ on what they suggest for your final retirement stash. While Fidelity's savings yardsticks aim for at least eight times your annual salary, T. Rowe Price financial planner Stuart Ritter thinks you should crank that up to 12.5 times.
Someone approaching retirement with a $100,000 annual salary who wants to maintain their lifestyle with 75 percent of that will need $50,000 a year from savings and another $25,000 from sources like Social Security. Based on a 4 percent annual withdrawal rate, that means having a formidable $1.25 million in the bank.
Therein lies the pitfall of telling people how much they should save: The goal can seem impossible. Still, with early progress reports and lower initial totals, Fidelity hopes that savers get on the right track and stay there.
If you're struggling to meet your target, a few key strategies may help, says Fidelity's McHugh. These include saving more, delaying retirement, downsizing the home, and moderating one's lifestyle expectations for the golden years.
And early intervention can help stave off pre-retirement overconfidence. That's what motivated New York City-based scientist Jean Siao, 39, who had saved only half as much of her annual salary, if you go by Fidelity's recommendations.
After perusing the math, Siao is clamping down on her budget, bolstering her Roth IRA and planning to ramp up her 401(k) contributions from the current 10 percent.
"Before, my saving was pretty sporadic, and I wasn't very disciplined about it," she says. "But now I know I'm behind where I need to be, and I'm saving as much as I possibly can."
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