A 2012 study from the consulting firm Aon Hewitt shows mixed news for 401k retirement plan participants. On the plus side, the average retirement saver puts away a little over 7% through their employer’s retirement plan. While that’s a decent savings rate, you really need to about double that rate to maximize your retirement readiness. Amazingly, of those who do save, about 1/3rd do not save enough to receive their employer’s full matching contribution. That’s like leaving free, 100% safe money on the table.
The report recommends an 85% income replacement ratio–an estimate of how much income you need to replace in retirement in order to enjoy your current standard of living throughout your retirement years. Another way to look at that replacement rate is to say you need about 11 times your current salary at age 65, plus Social Security, to have adequate retirement income. So if Bill makes $50,000 annually today, he would need about $550,000 in personal retirement savings at age 65.
The average retirement plan account balance is about $74,000. The median balance, however, is only about $23,000 (that means half of all participants have a balance of less than $23,000, and the other half have more than $23,000). So to get to that overall average balance of $74,000, there must be a good number of six-digit account balances out there.
One other troubling sign, depending on how you look at it, is a lack of trading activity. In 2011, only 15% of retirement savers made a trade in their 401k account. I’m all for low trading, low-cost retirement strategies. But I do think it makes sense for nearly all retirement savers to rebalance their accounts at least once per year. Rebalancing simply means restoring your target investment mix.
For instance, assume your target retirement mix is 60% stock funds and 40% bond funds; a year later your mix has changed to 65% stock funds and 35% bond funds due to a good year for the stock market. Rebalancing means selling 5% of your stock funds and buying 5% of your bond funds to restore your target 60/40 mix. Over time, rebalancing can help you sell high and buy low. But if only 15% of retirement savers are making trades in a given year, that tells me most folks are probably not rebalancing regularly.
So how can you benefit from the above information? Check your saving percentage; if you’re at 7% now, increase that by 1 percentage point this year and every year thereafter until you’re in the 14-15% range. Doing so consistently will quickly grow your retirement account balance. Rebalance your portfolio at least once a year (or at least check to see if you should rebalance once a year). Those two steps alone will greatly increase your retirement readiness.
Do you think you can do it? What are your thoughts about your own retirement savings? Are you on track for your goals?