The FINANCIAL — While only a few years separate working Americans ages 55-59 from those in their 60s, there are sharp differences in the savings they have amassed and steps they have taken to prepare for retirement. That’s one finding of Wells Fargo & Company’s annual Retirement Study released on October 22 during National Save for Retirement Week.
The median savings of working Americans age 60 or older is $50,000 against a retirement savings goal of $300,000. Working Americans age 55-59 have saved three times as much as those age 60 or older, having amassed $150,000 toward a retirement savings goal of $500,000. The study also found that working Americans age 60 or older started saving for retirement at an average age of 37, whereas those ages 55-59 started saving at an average age of 31. On behalf of Wells Fargo, Harris Poll conducted a total of 1,251 telephone interviews between July 13 and August 10, 2015, with 851 workers age 40 or older who are currently employed and 400 retirees.
“This study shows what a tremendous difference a few years can make when it comes to retirement savings,” said Joe Ready, head of Wells Fargo Institutional Retirement and Trust. “Those who are not yet retired and working past age 60 started saving at age 37, six years later in life than those in their late 5os. The fact that people in their late 50s have three times the savings of those age 60 or older shows that starting early and saving consistently are key to retirement saving.”
Planning to Save Later, Earn More and Work Longer?
Many working Americans put off saving because they assume they’ll have more time and money to save later in life. A third of working Americans age 55-59 say they “plan to save for retirement later in order to make up for not saving enough now,” as compared to 21% of those who are 60 or older with those same plans. In addition, 63% of those ages 55-59 and half (49%) of those 60+ say they “hope to earn more money in the future to save enough for retirement.”
Over half (54%) of the working 60-plus group say they will work until “at least 70” in order to have enough savings for retirement as compared to 40% of those ages 55-59. However, working longer may not be the solution, as nearly half of the retired respondents (49%) say they retired earlier than planned. Many did so as a result of conditions beyond their control: 37% because of health, and 21% because of an employer decision. Only 7% retired earlier than planned because they had adequate savings.
“Half the retirees in this study retired earlier than expected for reasons beyond their control. People who think working longer – perhaps into their 70s or later – is a retirement plan should realize they may not be able to work longer. Unforeseen circumstances crop up, and this is really important for people to recognize,” said Ready.
The cost of healthcare in retirement is another area that people may not predict correctly. Half (51%) of the retired respondents in this study say they say they are spending “more than they expected” on healthcare in retirement.
The Upside of Consistent Saving
Slightly less than half of the of retirees (47%) and those 40 or older and still working (45%) say they had/have saved for retirement consistently since the first day they started working, making these individuals “consistent savers.”
Interestingly, income level is not necessarily a factor to being a consistent saver, as 31% of those currently working with less than $50,000 in household income say they have consistently saved since they began working. The median retirement savings accrued by working Americans 40 years or older who have consistently saved is $160,000, compared to $60,000 saved by those who did not consistently save.
Consistent saving breeds a more optimistic outlook about the future: 71% of working Americans 40 or older who are consistent savers believe they will have enough saved to live comfortably through their retirement years as compared to 48% who are not consistent savers.
Consistent savers are also less likely to forecast a drop in their standard of living in retirement:
61% of working Americans 40 or older who are not consistent savers think their standard of living will drop in retirement as compared to 37% of consistent savers.
About half (49%) of retired Americans who were not consistent savers did say their standard of living went down as compared to 28% of retired consistent savers.
“Consistently saving from the start of one’s working life is the key to creating retirement savings. The more we can get this message across to younger generations, the better off they will be,” Ready said. “If people are in their 50s, they can start to save more aggressively. They should contribute the maximum amount allowed to the 401(k) plan, which is $18,000 in pre-tax dollars this year, as well as make catch-up contributions to help make up some ground. People can also leverage a health savings account, which is a good tool for amassing savings to be used for health care costs in retirement.”
The 401(k) Difference
Access to a 401(k) or equivalent plan makes a big difference in retirement savings. Seven in ten (69%) workers 40 or older have access to a 401(k) plan or equivalent.
Three-quarters (73%) of those with access say they wouldn’t have saved as much for retirement if they did not have it.
Consistent savers with access to a 401(k) plan have saved four times as much for retirement ($200,000 median) as compared to consistent savers without access ($50,000 median).
A majority of workers with access (84%) feel more secure about their retirement because they are contributing to it.
Six in ten (61%) workers with access say they will be able to save enough through their 401(k) to live comfortably in retirement.
Participating in a 401(k) plan is becoming the equivalent to a formal retirement plan:
Four in ten workers (38%) say participating in a 401(k) plan is their current retirement plan
30% say that their plan for retirement is a comprehensive savings and investment plan constructed with a financial professional.
17% say their retirement plan is Social Security.
“The power of the 401(k) comes across in this data, and it’s clear that people get the most benefit when they utilize it right at the start of their working life,” said Ready. “Access to payroll deductions for automatic saving, institutionally-priced investments, and education helps participants achieve positive results for their retirement.”
Satisfaction with 401(k) plans is high as 72% of workers 40 or older, regardless if they currently have access to a 401(k), are satisfied with the 401(k) as a retirement savings vehicle. However, there is interest among workers in getting more help with their 401(k) plans, with half (53%) of workers with access saying they would like more help from their 401(k) plan to make sure they’re making the best choices for their retirement. When asked what they would do with it if they were to leave their job in the next 12 months, 68% of workers enrolled and contributing to a 401(k) would roll it over and 30% would leave it alone. Just 1% of workers say they would cash it out.
Addressing Retirement Anxiety
High levels of anxiety about retirement permeate the landscape with eight in ten (81%) workers 40 and older and seven in ten (70%) retirees saying that retirement in America is in a “crisis state.” Even workers who are consistent savers share this feeling, with three in four (76%) agreeing with this sentiment.
Thirty-four percent of workers ages 60-plus believe they would need to win the lottery to survive financially in retirement, compared to 21% of the 55-59 set. One-third of workers age 60-plus believe they will never retire and will work until they die or are too sick to work, versus 19% of workers ages 55-59.
Tips for retirement saving:
Get started saving today. If you have the option to join your employer’s 401(k) plan, consider enrolling today and defer savings at a pre-tax rate up to $18,000 per year; participants age 50 and older can make up to $6,000 in additional catch-up contributions each year. Pay yourself first and defer as much of your salary as you can on a pre-tax basis. If you do not have access to a workplace retirement plan, consider setting up an automatic savings program and make systematic contributions of up to $5,500 if you are under age 50, or $6,500 if you are age 50 or older, through regular contributions to a Roth IRA (with after-tax dollars) or a traditional IRA (with pre-tax dollars) if you meet eligibility requirements.
Get the company match if it’s offered. If you are contributing to a 401(k) plan, find out if there’s a company match. If there is, consider taking full advantage of it. Remember that the money your employer contributes on your behalf can be added to the amount you’re contributing, and combining the two contributions helps give your overall savings goal a boost.
Increase your rate of savings. Research shows that the #1 factor in saving for retirement is your contribution rate, along with regular contribution rate increases. Find out if your employer’s plan offers the option to increase your contribution amount automatically and on a regular basis. That’s one less thing to remember, and it can be an easy way to help you gradually save more in preparation for retirement. You can always change the increase rate or limit for your automatic retirement plan contributions.
Leave your savings alone. It may be tempting to spend your savings if you change jobs or have an unexpected expense pop up, but it is important to consider keeping these assets growing in a tax-favored retirement account. Withdrawing money from your employer-sponsored plan can erode your retirement savings to the point where you may jeopardize your financial security in retirement. Keep your money working for you!