How close are today’s pre-retirees to being retirement ready? While there is still work to be done, the answer is closer than we might have expected. That’s the good news from a recent analysis by BlackRock and the Employee Benefit Research Institute (EBRI). The less-than-good news is that U.S. workers closest to retirement, and with the least amount of time left to bulk up their savings, are the ones who have the most work to do.
Here is how we examined the question of retirement readiness. According to many financial advisors, you will need to replace about 80% of your income in retirement1. Many Americans have two primary sources of retirement income, Social Security and retirement savings, usually in 401(k) plans and individual retirement accounts (IRAs). We focused on people in their last decade before the traditional retirement age of 65 to find out if those sources should be enough. And if not, how large is the gap?
We worked with EBRI to determine the median income for U.S. workers currently ages 55, 60 and 64. We then used those numbers to estimate their Social Security retirement benefits at what’s known as their “full retirement age.” Next, we collected the median retirement savings balances of people the same ages who have 401(k) accounts and IRAs in EBRI’s extensive database. Then, we used the BlackRock CoRITM Retirement Indexes to estimate the retirement income that those savings could provide. We introduced the CoRI Retirement Indexes a year ago specifically to help pre-retirees estimate the future income potential of their savings.
We found that the median 55-year-old is already on track to replace 69% of his pre-retirement income. But there is still a 14% gap that median worker needs to close to reach the goal of replacing 80% of pre-retirement income. And the gaps are wider for older pre-retirees. The results are shown in these three pie charts:
Sizing Up The Gap
Percentage of investors’ retirement-income goal estimated to be replaced by income from savings and Social Security, along with the gap, at different ages. All retirement income estimates use a scenario that assumes the median 401(k) and IRA savings of a U.S. investor in each age group, the Social Security payment estimated for the median income for each age group, and age-appropriate CoRI Retirement Index levels as of June 30, 2014. Retirement income goal is 80% of pre-retirement income, a figure commonly referenced by financial planners and reflected in Aon Hewitt’s 2008 Replacement Ratio Study. Retirement is assumed to begin at age 65