How to improve your retirement readiness
Some six in 10 Baby Boomers and Generation Xers are projected to have sufficient financial resources for retirement expenses, according to recent research.
That's the good news from the Employee Benefit Research Institute (EBRI), a non-partisan research group based in Washington, D.C.
The bad news? Roughly four in 10 early Baby Boomers, those born between 1948 and 1954, late Boomers, those born between 1955 and 1964, and Generation Xers, those born between 1965 and 1974, are projected to run short of money in retirement. Or, more likely, they won't be able enjoy the same standard of living they had during their working years throughout their retirement.
So what's the difference between those who are projected to have enough money in retirement and those who aren't? And, equally important, what can those who are projected to run short in retirement do to improve their retirement readiness?
According to Jack VanDerhei, the research director at EBRI, two big factors are at play. One is whether you are eligible to participate in an employer-sponsored defined contribution plan, a 401(k), at work. That, he says, is one of the most important factors for retirement income adequacy. And the second important factor is your income. The more you have, the more likely you won't run short in retirement. For instance, 86.4% of Americans who have annual income of more than $72,500, the highest income quartile, are projected to have sufficient financial resources in retirement.
Do you have a defined contribution plan at work?
According to VanDerhei, a tad less than one in five (17.2%) Gen Xers with annual income less than $11,700, the lowest income quartile, and no future years of access to a 401(k) plan would have sufficient income in retirement. But more than twice that number, 35.9%, would have sufficient income in retirement if they had 20-plus years of access to a 401(k) plan, VanDerhei says.
His advice to workers who don't have a 401(k): Consider working for an employer that offers a defined contribution or some other type of retirement plan. Yes, many workers can save for retirement on their own with an Individual Retirement Account. But research shows that most workers don't, VanDerhei says.
"You probably don't have much control over which income quartile you're in but having the advantage of working for an employer that sponsors a defined contribution plan would probably be the best thing to do," he says.
Early and late Baby Boomers who are projected to run out of money in retirement and who don't have 20 years of access to a 401(k) plan can also improve their retirement readiness, says VanDerhei. His advice for that cohort: One, contribute to your employer-sponsored retirement, assuming that you have one. Two, contribute at least as much as needed to get the employer's matching contribution. And three, calculate how much you need to accumulate in your nest egg to be able to retire at your planned retirement age and determine how much more you might need to save to reach that goal.
Early and late Boomers who want to increase their odds of not running out of money shouldn't be surprised if, as part of this exercise, they have to re-consider their planned retirement age.
What's your income? The other big factor, all that determines whether you'll run short of money in retirement is your income. Nearly nine in 10 (86.4%) of those in the highest income quartile are projected to have enough money in retirement while just 16.8% of those in the lowest income quartile will have sufficient assets in retirement.
So what can those who are in the lowest two income quartiles, those who earn less than $31,200 per year, do to improve their odds of not running out of money in retirement? "They have to seriously consider ramping up their current contribution rates if they are going to have any chance of (retiring) by age 65," says VanDerhei.
VanDerhei also recommends that those who are projected to run out of money in retirement talk with a professional before pulling the trigger. "Let them help you assess your chances of having a successful retirement at your current savings rate," he says. "There are just too many people who will automatically leave (the workforce) at age 62 or age 65 and then find out in a couple years there's no way they are going to have enough money."
It's better, he says, to work for a couple more years, perhaps at least until your full retirement age, than to it is to re-enter the workforce when you're in your late 60s or early 70s. "It's difficult to get back into the workforce," VanDerhei says.
Robert Powell is editor of Retirement Weekly, a service of MarketWatch.com. Email him atrpowell@allthingsretirement.com.