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Save Now or Pay Later to Avoid Poor Retirement Years
By Mary Deibel, Scripps Howard News
June 12, 2005
Recent index shows that most Americans aren't on track financially to live comfortably.
Americans stand to collect 59 cents in retirement for every $1 earned at work, with as much as 49 cents of that retirement money coming from pensions and Social Security, not personal savings.
Those findings by Fidelity Investment's new retirement readiness index, based on the mutual fund giant's survey of 1,900 households, mean that "many Americans will take a significant pay cut in their retirement years," Fidelity Personal Investments chief Jeffrey Carney said in a statement.
Most retirement experts say you need 70 percent to 80 percent of your pre-retirement income to maintain your lifestyle in retirement.
Boston-based Fidelity recommends replacing at least 85 percent of your pre-retirement income, but its index found that only 15 percent of the typical U.S. households are on track to achieve this goal.
Those sums don't include retirement income changes that Washington is considering, which could further cut the retirement income stream.
Consider that Social Security today replaces 42 cents on average of every $1 in pay earned during your work years: That makes up 42 cents of the 59 cents Fidelity's index calculates the typical worker will collect in retirement.
If Congress agrees to changes in Social Security, the numbers may fall.
Separate and apart from the Social Security investment accounts that President George W. Bush has proposed, he has embraced a change in the inflation adjustment formula as the way to solve Social Security's long-term solvency problem.
That formula change would drastically reduce Social Security's replacement rate for everyone except workers making $20,000 or less. Retirees who make the average wage, or $36,000 in today's dollars, would draw 26 cents in Social Security for every $1 they once earned in pay, and those making $60,000 in today's dollars just 17 cents for every $1 earned.
Congress and Bush are also looking to overhaul the laws governing traditional pensions after the Pension Benefit Guaranty Corp. picked up $6.6 billion in United Airlines' pensions under a bankruptcy court order that left United employees to absorb a $3 billion loss in pension benefits.
Employer groups are fighting the Bush administration plans to raise Pension Benefit Guaranty Corp premiums from $19 to $30 for each participant in well-funded pension plans with additional increases for shaky pension programs.
Tax-law changes also are in the retirement-income mix for Congress and Bush, with multiple tax-favored retirement accounts likely to be streamlined as part of tax reform.
House Ways and Means Chairman Bill Thomas, R-Calif., says the focus of the retirement security bill he will propose this month will foster savings help for "those who need to build a nest egg," not wealthy people who simply shift their money around.
Average workers will need it: As Fidelity found, as little as 10 percent of retirement income is likely to come from personal savings:
Young adult households typically have just $9,000 saved for retirement, to which they add $92 a month.
The typical midlife family has $30,000 in retirement savings to which it contributes $187 a month.
Pre-retirement households 55 and older have a $60,000 nest egg to which they add $229 monthly. But 11 percent of those 55 and older tell Fidelity they haven't started to save at all.
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