Survey: Advisor Relationship Improves Retirement Readiness

New survey results show that half of American households are at risk of not being able to cover essential expenses in retirement, but the numbers improve considerably for households that use an advisor.

Fidelity Investments’ 2018 Retirement Savings Assessment shows that 22% of households are in the “yellow zone” for retirement preparedness, meaning they are not on target and modest adjustments to their planned lifestyle will be likely. But a larger 28% of households are in the “red zone,” meaning they will likely need to make significant adjustments to their planned lifestyle.

And as might be predicted, households that have an advisor relationship also have a higher retirement score – with the data showing a retirement preparedness score of 86, which is in the good range, compared to 78, which is in the fair range.

The retirement score scale is:

  • 95+ is dark green/on target;
  • 81-95 is green/good;
  • 65-80 is yellow/fair; and
  • <65 is red/needs attention.

Even when controlling for income, those who use an advisor still have a higher retirement score than those who don’t. The biggest beneficiaries of an advisor relationship appear to be those in the lower income group, who see a 17% boost in preparedness, according to the report.

For example, for households earning less than $60,000, those who use an advisor have a retirement score of 83, compared to only 71 for those who do not use an advisor. Even higher up the income scale, the data shows a significant difference, as those making $100,000 or more who use an advisor have a retirement score of 89, compared to 85 for those who do not.

Despite the positive findings from using an advisor, the report shows that only 22% of households have a relationship with a paid professional advisor. And not surprisingly, this percentage increases with age and income level, according to the findings, as just 12% of people in their 20s use an advisor versus 35% in their 60s.

Fidelity suggests that while an absolute causal relationship is not possible to prove, it may be that households that use an advisor are better planners. For instance, the report observes that households that use advisors are also more likely to be taking into account the cost of health care in retirement and saving for it – with the findings showing a difference of 66% versus 47%.

As to the 50% of households that are on track to cover at least their essential expenses in retirement, the report shows that 32% of them are in the dark green zone and on target to cover more than 95% of total estimated expenses (up from 31% in 2016). The remaining 18% are in the green zone and on target to cover essential expenses, but not discretionary expenses like travel and entertainment; this number is down from 19% in 2016.

Fidelity concludes that the “cautionary news” is the state of America’s retirement readiness is in fair condition, but the “good news” is that it’s fixable and they have seen great improvements since the study was first conducted in 2005.

The findings in this study are based on data such as workplace and individual savings accounts, Social Security benefits, pension benefits, inheritances, home equity and business ownership. Data was collected through a national online survey of 3,182 working households earning at least $20,000 annually with respondents age 25 to 74, from Sept. 14 through Oct. 3, 2017.

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