U.S. News

New Tool Offers Good News About Retirement

Barbara Whelehan, Bankrate.com

Are you ready for some good news about America's readiness to retire?

Here it is: Americans are on track to meet 92 percent of their retirement income needs, according to the National Retirement Readiness Index designed by Fiduciary Benchmarks, a retirement consulting firm.

Thomas Northcut | Getty Images

Wow—92 percent! That's like getting an A on our national retirement report card. (Of course, that doesn't necessarily reflect the grades on our own individual retirement report cards.)

This rosy assessment flies in the face of the mostly bleak reports pushed out by many financial firms, retirement consulting groups and employee benefit trade organizations.

For example, last year global consulting firm McKinsey & Company released a report showing that the average American family is on track to meet just 63 percent of their retirement needs. For all practical purposes, a failing grade.

Similarly, the Employee Benefit Research Institute's 2009 Retirement Confidence Survey revealed that 54 percent of boomers between 45 and 54 years of age have less than $50,000 saved up for retirement, and 49 percent of those aged 55 and older are in the same boat -- floating up the proverbial creek without a paddle.

Another way to look at itBut the younger boomers with $50,000 are not so bad off, insists Tom Kmak, CEO of Fiduciary Benchmarks, who relies on a study by Georgia State University and Aon RETIRE Project to come up with the percentage of income Social Security will replace in retirement. (Bankrate's story on Figuring your retirement needs discusses that study.)

"Yes, $50,000 at age 45 does not sound like a lot of money," says Kmak. "But if you project it to age 67 using our assumptions, it is worth $670,000."

Their assumptions: The 45-year-old worker contributes about 8 percent a year; the employer matches 60 cents on the dollar, and the retirement account gets an average 8 percent return. The worker's salary and contributions increase each year with inflation, assumed to be 3.09 percent a year. When the employee reaches normal retirement age at 67, the worker would have $670,000 in his or her account balance -- which is actually worth $343,013 in today's dollars.

OK, so besides the erosive effects of inflation, there's more bad news: To have enough savings, you really can't retire until your "normal retirement age," which ranges from 65 to 67, depending on what year you were born. For baby boomers, normal retirement age is somewhere between 66 and 67.

The McKinsey study that shows a shortfall of 37 percent for the average American family assumes an average retirement age of 62. But retiring early results in a 30 percent reduction in Social Security benefits, and therein lies the disparity.

"If somebody wants to retire early, that's great," says Kmak. "But the fact of the matter is that's an expensive proposition. Most companies can't afford to fund 100 percent of the benefit for everybody to retire early. The government can't afford everybody to retire early. If you want to retire early, you should make sure you're on track to do that."

The methodology: Fiduciary Benchmarks' Retirement Readiness Index currently contains retirement plan information from 21,000 firms, though its database will double in a couple months. As for its methodology, first it comes up with an average wage (actually, a weighted average) that's representative of a particular industry. Then it takes the total account balance from a particular company plan and divides that balance by the number of plan participants to come up with an average account balance. For investment return, it assumes an average return of 4.9 percent and inflation of 3.09 percent. And it assumes that the retirement funds will last until you reach age 87.

The RRI tool reveals that people working for some industries are more prepared than others. For instance, those engaged in support activities for agriculture and forestry are more than ready for retirement -- on track to replace 161 percent of their preretirement income.

"People at lower wages have more of their money replaced by Social Security," Kmak says.

Also, people involved in support activities for agriculture and forestry are not that well-paid. "In addition, they're actually relatively thrifty, so they have a decent account balance."

At the other end of the retirement readiness spectrum are those in the technology industry (called "data processing, hosting and related services"). Kmak's explanation: People in that industry typically get more money from bonuses and stock options rather than a generous retirement plan. They make more money, and Social Security pays out a smaller percentage of their preretirement income. So they are only on track to replace 70 percent of their incomes on average.

It's entertaining to play around with the retirement readiness tool. Plug your employer's name to see if your plan is in the database. If so, hit the "benchmark group analysis" tab at top to see how the plan ranks compared to others in your industry. Hit the "minimum required investment return" tab to see how much the average participant in your plan must earn each year to stay (or get) on track.

In the future, Kmak plans to include features for individuals so they can gauge how they are faring compared to others in their own company plan. You may want to bookmark the site and come back at a later date to check it out.

In the meantime, plug your assumptions into Bankrate's Retirement shortfall calculator to see if you're on track.