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Popular financial advice often suggests that households should aim to replace between 65 and 85 percent of pre-retirement income in retirement in order to maintain their pre-retirement living standards. Some households can achieve replacement rates that are in the recommended range through Social Security and pension income alone. Others can reach these replacement rates with the addition of income from part-time work during retirement, housing equity and inheritances. But most households will need to rely on their savings to supplement their other retirement income. Yet, reports in the popular press often warn that Americans are not saving enough for retirement. How accurate are these warnings? Are Americans jeopardizing their well-being in their later years through inadequate retirement preparations? This issue in brief provides an overview of the available evidence on whether Americans are saving enough for retirement.
Do People Think That They Are Saving Enough?
Surveys that ask people about their retirement preparedness yield mixed results. For example, one recent survey found that nearly two-thirds of working Americans feel confident that they will live comfortably in retirement and almost three-quarters have started saving for retirement. However, the same survey also found that over half of workers feel they are behind schedule for planning and saving for retirement. Workers who have done a retirement needs calculation are more likely to be confident that they will live comfortably in retirement and are less likely to feel that they are behind schedule for planning and saving for retirement. However, more than one-half of workers have yet to determine how much retirement savings they will need.
What Have Economic Studies Found?
Many studies suggest that Americans nearing retirement need additional savings to allow them to maintain their current living standards in retirement. However, these studies may exaggerate the extent to which households have inadequate retirement savings. In particular, these studies exhibit one or more of the following limitations: ignoring housing equity, ignoring other sources of income that can be used to finance consumption during retirement, and disregarding continued saving prior to retirement. In addition, when researchers estimate how much saving individuals will need measured in terms of wealth as a share of earnings these savings targets are often interpreted as minimum requirements, thereby ignoring that current earnings may not accurately reflect average lifetime earnings. This possibility requires that, rather than a single savings target, researchers consider an alternative measure of savings adequacy that incorporates a distribution of targets that could allow households to maintain their preretirement living standards in retirement. When all of these considerations are taken into account, preliminary evidence suggests that saving may be adequate for a majority of households. Even so, there is some evidence of undersaving among the 5 to 25 percent of households with the lowest wealth-to-earnings ratios.
Although many workers feel they are behind schedule for planning and saving for retirement, adopting a broader interpretation of savings targets suggests that a majority of households will have sufficient resources for retirement. However, with the potential of a decrease in future Social Security benefits and the shift in private pensions from defined benefit to defined contribution plans, future retirees may need to rely more heavily on household savings to fund their retirement years. Therefore, it will be important to continue monitoring savings behavior to assess whether it is adequate to meet future retirement needs.
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