Many Americans expect to spend 20 years or longer in retirement but a new study from Aegon suggests that a lot of these individuals still have work to do in order to ensure a comfortable and financially secure lifestyle in old age. Specifically, surveyed U.S. workers scored a 6.7 out of 10 on the Aegon Retirement Readiness Index (ARRI), which assesses respondents’ overall retirement preparedness using a variety of factors such as level of planning and income replacement rates. Compared to most other developed nations, Americans’ average score is notably better and reflects a solid increase from 2012 when the ARRI was created. However, 6.7 is still well below what the index’s designers would describe as being a high score and therefore means that there is much room left for improvement when it comes to retirement readiness. For example, surveyed U.S. workers anticipate that the majority (57 percent) of their retirement income will come from a combination of personal savings and employer-provided benefits but 43 percent of their old-age finances are still expected to be derived from Social Security.
That creates a potential risk, especially for younger adults, given the rising cost of government retirement benefits, and nearly four in every ten respondents explicitly said that they are not open to increasing the retirement age as a way for shoring up the social program’s finances. More importantly, proper retirement preparing involves limiting one’s financial dependency on the government, and the best way to go about doing this is through a lifetime of habitual saving. Indeed, countless studies have shown that an early start to saving can result in a more favorable retirement outcome, and the Aegon report similarly found that people who stated that they always make sure that they are saving for retirement had significantly higher ARRI scores. Nearly half of respondents, though, reported that they did not start seriously saving for retirement until they hit certain life stages, e.g. got married or started a family. Since such events can often not occur until after the age of 30, many Americans are potentially spending several years in the workforce without contributing any of their earnings to a retirement savings plan in a meaningful way.
That is a missed opportunity because every additional year of saving means more time to invest the funds and potentially generate a better retirement outcome through compound growth and a smoother return profile. Automatic enrollment into a retirement plan, such as a 401(k), can help address this problem by getting many Americans to kick start their saving in a more timely fashion than they might have on their own without any external nudge. Fortunately, surveyed adults seem quite open to this idea because nearly two-thirds of all respondents said that it would be okay if they were automatically enrolled into a workplace-provided retirement savings plan with an initial contribution level of 6 percent of their annual salary. In fact, 61 percent of surveyed workers reported that they would still find a default contribution rate of 8 percent appealing, and three-quarters of respondents even said that they believe the government should encourage employers to automatically enroll all their employees into a retirement plan.
Sources: Aegon Center for Longevity and Retirement, Transamerica Center for Retirement StudiesPost author: Charles Couch