Middle-Income Households Boost Retirement Savings Amidst Retirement Crisis Concerns
Despite the ongoing discussion of a retirement crisis in the United States, positive news has emerged: middle-income households are making substantial strides in retirement planning. According to a Principal Real Life Retirement Journeys survey, households earning between $50,000 and $100,000 annually are setting aside approximately 8% of their income towards retirement.
By leveraging employer matching contributions, this savings rate can rise to 12%, approaching the recommended 10-15% range advised by retirement experts. "Would I like to see them get to 15%?" asked Jean Chatzky, host of the Her Money podcast. "Absolutely. Research indicates that saving 15% consistently over an extended period can provide a sufficient retirement fund that, when combined with Social Security, can replace 75-80% of pre-retirement income."
The overall trend suggests a positive direction. Chatzky notes that this savings rate "is pretty good," particularly considering other studies indicating that some individuals save minimal percentages or have less than $400 set aside for emergencies. "When discussing a retirement savings crisis in this country, this statistic suggests a potential turnaround," Chatzky remarks.
Determining the ideal retirement savings amount is crucial. Chatzky advises that, "even if you're saving 15%, it's beneficial to know the nest egg you need to fund your desired retirement lifestyle. Experts suggest amassing approximately 10 times your salary by retirement."
For instance, if your annual salary is $100,000, you'll need $1 million in retirement savings. Compounding can significantly boost your savings. Many retirees express regret over not starting retirement contributions sooner, according to Chatzky.
Automatic enrollment and auto-escalation have facilitated retirement savings through 401(k) plans. Automatic enrollment significantly increases participation rates by enrolling employees unless they opt out. Auto-escalation enhances savings by incrementally increasing contributions annually.
"My favorite tip is to embrace technology," says Chatzky. AARP research shows that employees are 15 times more likely to save for retirement with workplace plans and 20 times more likely if savings are automated.
Chatzky emphasizes maximizing available retirement savings accounts, including Roth accounts, traditional IRAs, 401(k)s, health savings accounts (HSAs), nondeductible IRAs, 529 plans, and taxable accounts.
Despite the encouraging statistics, the Principal study revealed that 78% of nonsavers still plan to save for retirement. They cite high expenses, low income, and debt as primary obstacles.
Chatzky acknowledges these challenges, noting that inflation has increased expenses and consumer debt has risen. She suggests "backwards budgeting," which involves analyzing expenses, categorizing them, and identifying areas where small changes can free up cash for debt repayment or savings.
Chatzky also recommends reviewing subscriptions and meal planning to reduce expenses. Checking credit scores and exploring options like balance transfers or debt consolidation can also lower interest costs and facilitate debt repayment.
Robert Powell, retirement expert and financial educator, provides comprehensive retirement planning guidance on Decoding Retirement, every Tuesday.