Ready for Retirement at Age 65? 70?
A study cited by the Employee Benefit Research Institutecast doubt on whether most Americans will be ready to retire at age 70, let alone age 65. EBRI researcher Jack VanDerhei determined that 90% of workers in the highest-income quartile have saved enough for retirement by age 65 to have a 50% probability of not outliving their assets. Those in the next-highest quartile would have to work until age 72 to have a 50% probability of not running out of money, while those in the third-lowest quartile would have to work until age 81.
If these numbers sound surprising, VanDerhei suggests that previously published data that was more optimistic failed to consider escalating health care costs and disregarded longevity risk.
One strategy individuals can follow to improve their retirement readiness is to work longer. The number of households viewed as being ready for retirement rises 33% when workers who participate in defined-contribution plans (e.g., a 401(k) plan) postpone retirement until age 70. Even if someone does not participate in a plan, 23% of households are more ready when retirement is postponed from age 65 to age 70.
One way of determining whether or not a person is retirement ready is to calculate retirement savings proportionate to final-year income. Fidelity Investments suggests employees aim to save at least eight times their ending salary to meet basic income needs. To achieve this goal, workers should save at least one times their salary by age 35, three times their salary by age 45 and five times their salary by age 55. The final ratio assumes a person will need to replace 85% of his income in retirement.
Fidelity based its calculation on a hypothetical worker participating in a defined-contribution plan. The worker started saving at age 25, retired at age 67 and lived until age 92. The ratio of wealth-to-income factors in savings outside of the employer-sponsored plan and assumes the receipt of Social Security wages.
Both analyses point out the importance of saving. Greater wealth heading into retirement increases the odds of having enough money once in retirement.
Sources: “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?” by Jack VanDerhei, Ph.D., Employee Benefit Research Institute; and “Fidelity Outlines Age-Based Savings Guidelines to Help Workers Stay on Track for Retirement,” Fidelity Investments press release.