How prepared do you feel for retirement? When is the last time you even thought about retirement planning?
As millions of baby boomers approach retirement and the federal retirement system remains antiquated, many Americans worry about how they will fare in the years after they stop working.
The good news is you can be among those who will retire stress-free and comfortable. It all starts with informed action. As we begin 2020, let’s take a closer look at the state of retirement in America.
Responsibility for Retirement Savings Shifts Increasingly Towards Individuals
As financial advisors in Denver, we hear it often from our clients – how much will I need to retire, and will I have enough?
Historically, Americans have relied on the federal Social Security program to provide a substantial part of their post-retirement income. In addition to Social Security, employer-sponsored retirement plans have been an important vehicle for investing in a personal retirement plan.
In recent years, however, both Social Security and employer-sponsored retirement programs have reduced the amount of support they provide, creating a large retirement gap for many working Americans.
- Since 1983, the Social Security program has gradually raised the age for receiving full retirement benefits from 62 to 67
- Many private employers have switched from pension, or defined benefit (DB) plans, to defined contribution (DC) plans like 401(k)s and IRAs
- In 2014, only 51% of private-sector workers had access to an employee-sponsored retirement plan (down from 60.4% in 1999)
- Of those that provide plans like 401(k)s, 403(b)s, 457(b)s, SEP IRAs, and Simple IRAs, fewer employers are providing matching employee contributions
This combined reduction of employer-sponsored plans and Social Security benefits puts a heavy saving burden on individuals, many of whom are undereducated about retirement planning. To maintain their standard of living in retirement, the typical working American now needs to replace roughly 85 percent of pre-retirement income.
Participation in Defined Contribution Retirement Accounts is Highly Correlated with Income
Now that we as Americans are mostly responsible for our retirement planning and investment strategies, how prepared are we?
The short answer is not very.
Across the political aisles, Americans say the nation faces a retirement crisis, according to a recent report. Indeed, almost 60% of all working-age individuals do not own assets in any type of personal retirement account.
There are marked disparities in retirement account ownership, however, which are often tied to income and wealth. Not surprisingly, the higher your income, the more likely you are to have a retirement account. On average, those with assets in a retirement account earn three times the income of those who don’t.
Age is also a factor: 72.5% of workers aged 21 – 34 have no assets in a retirement account. Overall, that’s 100 million Americans between the age of 21 and 64 who do not have anything saved for the future.
Do You Know Your Retirement-Savings-to-Income Ratio?
One easy way to look at retirement savings is as a multiple of your current annual income. As a rule of thumb, you’ll need to have ten times your salary saved by the time you want to retire--yet most working-age individuals are nowhere near this target ratio. The median balance for near-retirement individuals with a 401(k)-type account or IRA is around $88,000. If you follow the traditionally recommended strategy of withdrawing four percent of the account balance per year, that amounts to less than $300 per month.
Your retirement-savings-to-income ratio provides a simple gauge to evaluate how well you are doing in preparing for retirement given your income level.
Good News for Retirees in Denver
Another thing to consider when retiring is your location—some places offer more benefits than others. If you’re planning for retirement in Denver, for example, you’re not alone.
People love retiring in Colorado for the tax rates, cost of living, plentiful activities for seniors and high-quality, affordable health care, among other things. Colorado was recently named the third best state in the nation for retirement, and in the top ten for life expectancy, access to adult volunteer activities and the number of doctors per capita.
- In the Denver metro, there are more than 24 health care facilities per 1,000 seniors, compared with just about 19 per 1,000 seniors in the U.S.
- If you’re planning to downsize your home in retirement, you may have a healthy pool of buyers: Millennials are the largest pool of homebuyers, comprising 23.7% of Colorado’s population
- Although Colorado does tax social security income, the individual income tax rate is relatively low overall (recently lowered from 4.63% to 4.5%)
- Denver is an area of great economic stability, ranked in 2018 as having the nation’s best economy
While the majority of Americans may be unprepared for retirement, there is a lot you can do to make sure you’re ready for retirement when it comes. Most importantly, start saving now! A financial advisor can help you understand where you are currently and how to get to where you want to be.
For more information and tips about retiring happy and healthy in this beautiful city, get the free 2020 Guide to Retiring in Denver.