By Robert Powell, MarketWatch
Odds are high that you haven’t saved enough money to retire in the manner in which you desire. That’s the bad news. The good news is that you can easily gauge just how close or far away you might be. And the first to thing to check is how much you have set aside for retirement.
The average so-called full-career worker at a large employer needs to have 11 times their pay, after Social Security, set aside at age 65 in their retirement nest egg to expect to have sufficient assets to get through retirement.
Or least so says research conducted by Aon Hewitt, which has been studying whether workers at large firms will have the financial resources to meet their post-retirement needs since 2008. Including Social Security, you will need 15.9 times pay to maintain your standard of living throughout your retirement years.
According to Aon Hewitt’s Real Deal 2012 Retirement Income Adequacy at Large Companies study, workers who have 11 times pay set aside when combined with Social Security will be able to replace in year one of retirement 85% of their pre-retirement income. Read that research . The 85% rule of thumb reflects one’s final salary, adjusted for decreased savings and taxes, increasing medical costs and changing expenditures in general, and inflation.
Of course, there are some adjustments that must be made to this rule of thumb based on your income. (We’ll talk more about that in a second.) But in essence, one quick way to determine if you’re on track to having enough money for retirement is to divide your assets earmarked for retirement by your salary.
So, for instance, if you’ve got $500,000 set aside and your salary is $50,000, you’ll have 10 times your pay to fund your retirement, which, based on Aon Hewitt’s study, is just barely enough money to maintain your standard of living in retirement.
Will you be prepared if you keep doing what you’re doing?
Now truth be told, many workers don’t have enough set aside to maintain their standard of living in retirement. In fact, the Aon Hewitt study projects that the employees who currently contribute to their employers’ savings plans and who retire at age 65 after a full career will, on average, accumulate retirement resources of 8.8 times their pay, which is a shortfall of 2.2 times pay. Workers who don’t have a defined benefit face a shortfall of 3.8 time pay.
Of course, averages can be misleading. So for context, consider this: Some people are on track to retire in comfort and some are off by quite a bit, according to Aon Hewitt’s study.
Almost 30% of employees are now on track to retire comfortably at age 65, while 21% of employees are expected to have a shortfall of more than six times pay at age 65.
For the record, the resources calculated by Aon Hewitt include accumulations of employee savings in their employers’ defined contribution plans (4.1 times pay), accumulations of employers’ additions to defined contribution plans (2.6 times pay), and defined benefit pensions (2.1 times pay).
Workers saving for retirement using a Fidelity 401(k), by the way, now have on average $80,900 in those accounts and workers 55 and older have, on average, $150,300 set aside, according to a release. Read Fidelity Reports Record Gains For 401(K) Savers Since 2009 Market Low .
To be fair, Aon Hewitt’s study does not reflect savings or other retirement assets outside of the employer-sponsored plans, which is where many people also save for retirement. And for some, the amounts saved in an IRA could make up some of the 2.2 times pay shortfall.
For instance, the total average IRA account balance in 2011 was $70,915, while the average IRA individual balance (all accounts from the same person combined, since many individuals own more than one IRA) was $87,668, according to a report released this week by the Employee Benefit Research Institute (EBRI).
But there is one more caveat. The 2.2 pay shortfall applies only to Aon Hewitt refers to as full-career contributors, workers who have 30 years of employment and contribute to a 401(k). Other workers, those who don’t contribute to a 401(k), face a 10.8 times pay, and all employees face a shortfall of 5.3 times pay.
What can you do to improve the outcome?
So what can the average worker do to make up the nest egg shortfall if they have one, and assuming they don’t want to reduce their standard of living in retirement?