Half of Americans Are Wrong About Their Retirement Savings

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Some financial mistakes are easier to recover from than others. Failing to properly plan for retirement falls into the not-so-easy camp. And yet, the latest in a long series of retirement preparedness studies indicates that many working age households in the U.S. are making this very mistake.

This new study, prepared by the Center for Retirement Research (CRR) at Boston College, analyzed two key findings. First, it compared people's objectively measured, actual retirement preparedness with their perceived preparedness. And second, instead of just highlighting how many people are less prepared than they think (a common finding among retirement studies), it also found that some people are actually more prepared than they realize, causing needless worry.

Let's break it down.

Over half are not well prepared

According to the CRR study, over half (52 percent) of working age households are at risk of not being able to maintain their current standard of living in retirement. That's even if these households work until age 65, annuitize all of their financial assets, and turn their home equity into an income stream via a reverse mortgage.

In 1989, just 30 percent of households were deemed to be at risk. The study's authors attribute the growth in this number to three main factors:

• The increased time people are spending in retirement — the result of a fairly static average retirement age (around 63) combined with lengthening life spans.
   
• Increases in Medicare premiums.
   
• The sweeping change from defined-benefit to defined-contribution retirement plans, such as 401(k) plans. In managing their own retirement accounts, the authors said, "individuals make mistakes at every step along the way," which has resulted in a woefully inadequate median retirement account balance of just $111,000 for households nearing retirement.

Over half of the unprepared don't realize it

Of the 52 percent of households that are at risk of not being able to maintain their standard of living in retirement, the CRR study found that nearly two-thirds (63 percent) don't know they're in trouble at all — the worst possible situation. (See also: 10 Signs You Aren't Saving Enough for Retirement)

The study's authors identified two main reasons.

First, there is a "wealth illusion" that comes from having a 401(k). In other words, a person may have what seems like a lot of money in their plan, but not realize how little income it could actually produce in retirement.

For example, a standard assumption is that 4 percent of your retirement savings can be withdrawn each year in retirement without too much danger of running out of money. A $100,000 balance would then translate into just $4,000 per year.

The second reason is a false sense of security that comes from having a relatively high income. A high-income earner may not understand that Social Security benefits will replace a smaller percentage of his or her income than someone with a lower income. In other words, for high-income people, it takes more personal savings to maintain their standard of living in retirement than they may realize.

Of those who are prepared, half don't realize it

If 52 percent of all working age households are not adequately preparing for retirement, that means 48 percent are doing a good job. However, of those prepared 48 percent, the CRR study found that half worry that they're not on track. Of course, that's a much better problem to have than not realizing you're unprepared, but unnecessary worry is still a problem.

The study's authors cited three main factors:

• For homeowners, not understanding how much income could be generated through a reverse mortgage.
   
• For those still covered by a defined-benefit pension plan, not fully appreciating just how valuable that benefit is. (See also: If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do)
   
• If married, not understanding how much money they may be entitled to via spousal Social Security benefits.

Solutions

What should you do if you realize you may be under or over-preparing for retirement? Run some numbers using a retirement planning calculator — preferably a couple of calculators since different tools use different assumptions — and rerun the numbers periodically. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

Knowledge is your best bet when it comes to staying on track with your retirement savings. Don't just guess. Figure out how much you need to be investing each month so that you can afford to live comfortably in your retirement years, and then, make the necessary changes in your budget to set that money aside. (See also: 7 Retirement Planning Steps Late Starters Must Make)