IMHO: The Lure of Averages

Those of you who find Fidelity's updated research results a bit "rosy" compared with other projections may recall comparable results from their readiness index a year ago.

Editor’s Note:   The following was originally published on February 6, 2006 in our AdviserDash email publication for financial advisers.

A couple of weeks ago, Fidelity put out a press release highlighting the fact that Boomers turning 60 this year surpassed the $100,000 mark in average account balance, a figure based on Fidelity recordkeeping data. While there was something almost celebratory about that headline, I couldn’t help but be disappointed by that figure. Sixty-years-old and only $100,000 in their 401(k)? I’ve played with enough retirement planning calculators in my time to know that the odds of that sum providing a comfortable retirement – even with another five to 10 years of accumulation – weren’t very good.

Of course, the balance ($112,000, actually) was an average – and one ought always to be cautious in extrapolating too much from those combinations. Still, in the very next sentence, Fidelity projected that the older Boomers (those age 50-59, including those in the aforementioned average) are on track to replace 60% of their pre-retirement income. And while there was a cautionary tone in the press release about this finding (Fidelity cites 85% as a target), I couldn’t help but be reassured by that figure. Only $100,000 in their 401(k), and they are on track to replace 60%? That was a much better result than my mental math projected!

I found a clue to the dilemma just a bit lower in the press release – where it noted that 61% of older Boomers “expect” to receive a pension to help supplement their retirement savings, according to Fidelity’s Retirement Index (see  Fidelity: Americans’ Retirement Savings Way behind Schedule ). In fact, the folks from Fidelity were good enough to step through the high-level assumptions behind the projected replacement ratio, and – bearing in mind that these are averages – roughly a quarter of the 61% would come from a defined benefit plan, roughly a third from Social Security – and only the remaining 10-20% was projected to come from a defined contribution plan and personal savings.

The good news is that the math “worked,” at least in terms of averages. Fidelity’s $100,000 average is in line with projections I have seen in other surveys, and many of today’s retirees draw more than a third of their post-retirement income from Social Security. However, it was hard not to look at the rest of that projection – particularly the dependence on a defined benefit plan check – and wonder how realistic those Boomer expectations were.

In sum, the projections looked reasonable – but the assumptions they were based on looked more like wishful thinking.