America's retirement preparedness score drops: Fidelity

Amid a volatile market, many Americans are pulling back on retirement savings, Fidelity found.

The average American’s Retirement Score has dropped to 78, a decrease from its 2020 all-time high of 83, according to the latest Retirement Savings Assessment report by Fidelity Investments

This means the typical American has a 78% chance of covering estimated retirement expenses in a down market, based on Fidelity’s assessment. The Retirement Readiness Score ranges from zero to 150+. An average score of 78 puts people in the "yellow" or "fair" range of 65 to 80. 

More than half (52%) of those surveyed for the assessment may need to make changes to their retirement savings strategies to make up for any shortages, Fidelity reported. Plus, one-third (34%) of respondents were in the "red" or Retirement Readiness Score of zero to 64, "meaning significant adjustments may be likely," Fidelity said in its assessment report.

The Retirement Readiness Assessment report comes amid a period of economic uncertainty, stubborn inflation and recession fears

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Over 25% of Americans contributed 3% or less to retirement plans

Americans are saving less for retirement amid volatile market

The main drivers of America’s drop in retirement readiness were saving less and investing more conservatively, according to Fidelity’s assessment. 

Out of those who took a conservative approach, 57% said they were worried about losing their savings by investing too aggressively, Fidelity reported. And even though America’s average savings across generations have increased by $40,000 since 2020, many are putting less toward their retirement, Fidelity said in its report. In fact, millennials and boomers decreased their savings rate by 0.2% and 2.2%, respectively, while Gen X-ers increased their savings rate by 1.4%, Fidelity found. 

"American savers continue to navigate through uncertainty, and as a result, may consider pulling back on saving for the future," Rita Assaf, the vice president of retirement at Fidelity Investments, said in a statement.

But an expert suggested that people stay on track even in times of economic volatility.

"It’s important to remember that market volatility is totally normal," Ben Bakkum, an investing researcher at Betterment, said. "When investing, the concepts of risk and return are inextricably linked—over long time horizons, risky yet well-diversified investments are likely to compensate investors for bearing the chance of drawdowns in the short-run, otherwise no one would want to invest in risky assets. Volatility is a manifestation of the risk investors saving for retirement will likely ultimately be paid for taking."

Bakkum recommends people not make any sudden changes as a result of market movements and instead invest "across different asset classes, geographies and company sizes so as to avoid the kind of losses that can occur with concentrated bets and be hard to recover from."

Furthermore, planning is key to retirement readiness, Fidelity suggested

"When it comes to long-term investing, staying focused on your individual goals is critical," Assaf said. "Having a plan in place is one solid way to help weather any storm, as we’ve seen the last few years and weeks with the pandemic, inflation and market volatility."

Americans could stay on track to a comfortable retirement by aiming to invest at least 15% of their income in tax-advantaged retirement accounts, Fidelity said.

"If 15% isn’t possible, get in the habit of increasing your contribution rate by 1% each year until you get to the 15%," Fidelity said in its report. "Even small increases in savings can make a big difference."

Americans can also benefit by investing in the right mix of stocks, bonds and cash based on their age and appetite for risk, Fidelity suggested. Waiting to collect Social Security could also provide maximum benefits.

"If you are able to, waiting longer to retire has its advantages, including more time to build savings and increased Social Security payments," Fidelity said in its report. "For example, claiming Social Security at age 70 instead of age 65 could increase your payments by 43%."

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Retirement plan balances increased in Q4: Fidelity

Even though America’s Retirement Readiness score has dropped, average retirement account balances increased in the fourth quarter of 2022 from the previous three-month period, according to research by Fidelity.

The average IRA balance increased to $104,000 in Q4 2022, a 2% spike from the prior quarter, Fidelity reported. Moreover, the average 401(k) balance was $103,900 in Q4, up 7% from Q3. Meanwhile, the average 403(b) account balance increased to $92,683 in Q4, up 6% from the previous quarter.

"Despite these concerns around economic uncertainty, retirement savers have their eye on the prize and are continuing to invest in their future," Fidelity said in its report. 

In addition, the average account balance for self-directed 401(k)s increased to $280,099 for Q4, up by 2.45% from the last quarter, according to a report by Charles Schwab

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