Do you face a big pay cut in retirement?

By U.S. News & World Report

The good news and bad news on retirement: Americans are a little better prepared to finance their golden years, but they're still looking at steep pay cuts.

The typical American household is on track to replace 58% of its income in retirement, according to a new study by the Fidelity Research Institute. That's a little better than last year's 57%. The figure is based on projected income from personal savings, including 401(k) and individual retirement accounts, pensions and Social Security.

But at a 58% replacement rate, a worker earning $50,000 annually would have only $29,000 a year to live on in retirement.

"We're beginning to see a positive savings trend," says Guy Patton, the executive director of the Fidelity Research Institute. Yet "the typical household will face a 42% cut at retirement when compared to their pre-retirement income levels."

You'll need less, but . . .

To be sure, many workers say they'll require only a fraction of their current salaries to fund a happy retirement. Indeed, half of all workers surveyed recently by the Employee Benefit Research Institute said they would need less than 70% of their current salaries once retired.

Yet conventional wisdom among financial planners says you should save enough to generate at least 70% of your pre-retirement income. And a majority of the real experts -- people who are actually retired -- say they need at least 95% of their pre-retirement income. So the fact that Americans are on track to replace only 58% of their paychecks is troublesome.

If there's a silver lining in this, it's that baby boomers -- the generation that economists are particularly worried about -- are doing better than other age groups. According to Fidelity, the typical boomer (ages 43 to 61) is on track to replace 62% of pre-retirement income. That's significantly better than Generation X-ers (ages 25 to 42), who are likely to replace only 54% of their paychecks.

Another reason for hope: Workers can improve their situation significantly simply by saving more now. The average baby boomer currently saves only 4.3% of annual income, according to Fidelity. But if boomers were to boost that rate to 13%, they're likely to replace 85% of their annual income.

Among all workers, the current savings rate is just 3.5% of income. By boosting that to 12%, you could expect to increase your retirement income to 85% of your current paycheck, the Fidelity study said.

So the message of this study is clear: If you want to spend more later, you have to save more now.

Who's ready to retire? 

	All	Baby boomers	Generation X
Income replacement based on current savings rate	58%	62%	54%
On track to replace 85% of income	15%	15%	13%
On track to replace 70% of income	33%	37%	27%
Current savings rate	3.5%	4.3%	2.9%
Savings rate needed to replace 100% of income	19%	20%	17%
Savings rate needed to replace 85% of income	12%	13%	12%
Percentage of workers who are not yet saving	18%	16%	20%

Source: Fidelity Research Institute

This article was reported and written by Paul J. Lim for U.S. News & World Report.

Published April 5, 2007