“The average household will be in retirement for 25 years or more,” says John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity Investments. “Fidelity’s analysis indicates that a majority may not be adequately preparing for those years. The good news is there are steps people can take, no matter their age or income, to help improve their retirement readiness, and get towards ‘green.’ But the time to act is now.”

“We believe a goal-centered approach provides a clear picture of the state of America’s retirement readiness,” says Sweeney. “We ran more than 2,200 retirement income plans from a cross-section of the population against our planning models to see how well Americans are positioned to cover estimated retirement expenses, and how they might do better. We hope that by educating people we can motivate them to actions that lead to success.”

The new measure places preretirees into four categories on the retirement preparedness spectrum, which are linked to a numeric range (the higher, the better):

♦ Red: Poor (less than 65). Not on track to sufficiently cover all essential retirement expenses in a down market. Significant adjustments to planned lifestyle are likely.

♦ Yellow: Fair (65–80). Not on track to sufficiently cover all essential retirement expenses in a down market. Modest adjustments to planned lifestyle are likely.

♦ Green: Good (80–95). On track to cover at least estimated essential expenses, but not discretionary expenses like travel. (The survey assumes 80% of estimated retirement expenses are essential.)

♦ Dark green: Very good or better (95 or higher). Even in a down market, these households are on track to cover at least 95% of total estimated expenses, such as travel, and essential expenses, including health care, housing, and food.2

First things first: Set a goal.

How do you get on track? First, estimate how much you will need to spend in retirement—for your house, food, healthcare, vacations, etc.—and what income sources you can depend on —including Social Security, pensions, lifetime annuity payments, as well as accumulated savings [IRAs, 401(k), etc.]. As a starting point, Fidelity recommends setting a retirement spending target of 85% of your estimated preretirement after-tax income. This is because Fidelity research indicates that expenses tend to drop once a person stops working—on average, by about 15%, because there’s no longer a need to incur costs like commuting, work-related expenses, saving for retirement, etc.

Of course, your personal income replacement goal in retirement could be much higher or lower than 85%, depending on key factors like income level, your health and lifestyle choices. Indeed, in our study, individual income replacement goals varied widely. (For details, read Viewpoints: What will you spend in retirement?) Remember, these guidelines are just starting points for a retirement plan. Particularly as you approach retirement, we strongly recommend that you prepare your own retirement budget.

Consider six ways to accelerate your retirement preparedness

Are you behind? Don’t fret. Consider six ways to accelerate your progress—three to take before retirement and three after (for details see “Assumptions and impact of hypothetical changes,” below). Of course, not all these steps will be possible or appropriate for everyone. But we think they are solid starting points to help you determine what is right for you.

Steps to consider before retirement

• Raise savings now. As a general guideline, set an annual savings goal of 10% to 15% or more of your income, and increase your savings rate in small steps until you achieve that goal. That’s a total of your savings and any employer match. While it may seem daunting, even modest increases can add up to major improvements in retirement readiness over time. Adjusting the savings rate of all survey respondents to the 15% level improves the overall RPM score from 74 to 82, just into the green.
• Revisit asset mix. Although you can’t control market behavior, you can affect its long-term effect on your portfolio through investment choices. By replacing portfolios that are either too conservative or too aggressive with an age-appropriate allocation, the median RPM increases from 74 to 77.
• Retire later. The longer you can wait, the more time you have to build savings. Also, waiting until age 70 to take Social Security may help you maximize your benefit, assuming you expect a long retirement. By adjusting the reported expected retirement age to secure the full Social Security Retirement Benefit (between 65-67) the median RPM increases by 9, from 74 to 83.

Steps to consider in retirement

• Return to work part-time. This can boost retirement income—and help keep you active and involved. In our survey, 50% of households plan to have at least one person working in retirement. In the analysis, if we assume all respondents work in retirement for one to five years, depending on their retirement age, the median RPM increases from 74 to 79.
• Realize home equity. If you own your home, estimate the impact of downsizing and investing the proceeds. The median RPM score increased three points by converting 25% home equity into investible assets for retirement. What’s more, property maintenance costs will most likely decrease, freeing up assets for other retirement expense needs.
• Reallocate part of your savings into an annuity. Combining a lifetime fixed income annuity with an investment portfolio can reduce the risk that you will outlive your assets. The median RPM score increased by four points with the inclusion of an annuity.

This article is also published on Fidelity Viewpoints.