October 31, 2017
Older Savers Inch Ahead: $135,000 in 401k
The typical baby boomer couple had $135,000 in retirement savings last year, up from $111,000 in 2013 amid a rising stock market and a strong job market that has kept them employed, according to a report on the new Survey of Consumer Finances (SCF) by the Federal Reserve.
Yet $135,000 – the balance for working couples who have a 401(k) – won’t go very far. This amount, held in both their 401(k)s and IRAs, will generate about $600 per month, said the SCF analysis by the Center for Retirement Research, which supports this blog. That’s obviously not enough to supplement most retirees’ primary source of income: their Social Security benefits, which are slowly eroding for various reasons. The purchasing power of the $600 will also be eroded by inflation over time.
Another way to assess retirement preparedness for 60-year-old couples hoping to retire in five years is that they need assets equal to 8.5 times their household income at age 60. They actually have around 2.5 times income, on average, the researchers found. This assumes a replacement rate of 75 percent, a reasonable target for how much of a working couple’s income they will need to maintain their standard of living into retirement.
It’s Halloween today, and here is more evidence of just how scary Americans’ retirement prospects are: the $135,000 applies only to older people with retirement savings – about half don’t have a retirement plan at all at work.
But among those who are saving, the 401(k) plan is key. This is where retirement funds are saved and accumulated, while the IRA is primarily a depository for rolled-over 401(k)s. Outside these retirement accounts, many Americans don’t have other savings.
Clearly, retirement accounts need to grow, which requires making 401(k)s work better in a U.S. retirement system increasingly reliant on them as the old-style pensions disappear. Employers have made one change that has been effective in increasing participation in 401(k)s: automatically enrolling new – and, more recently, existing – employees. Once enrolled, workers tend to stay put.
The report suggests further automation could improve the results. If 401(k) contribution rates are set up so that they automatically increase over the years, it could bring workers’ savings levels more in line with what they will require in retirement.
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