Hewitt Study Shows Four in Five Americans Not Expected to Meet All of Their Financial Needs in Retirement
May 03 2010 - 9:00AM
Business Wire
The average U.S. employee will need more than 15 times their
final pay in retirement resources1 to maintain their current
standard of living during retirement, according to a new analysis
from Hewitt Associates, a global human resources consulting and
outsourcing services company. While this estimate hasn't worsened,
meeting projected retirement needs has become a greater challenge
for individuals, many of whom experienced decreases in their
retirement accounts over the past two years. As a result, four out
of five workers are still expected to fall short of meeting all
their financial needs in retirement unless they take action to
improve their savings habits or retire at a later age.
When factoring in inflation and postretirement medical costs,
Hewitt projects employees will need 15.7 times their final pay in
retirement resources to meet their financial needs in retirement,
which is consistent with Hewitt’s prior projection in 2008. Of the
15.7 times final pay, Social Security is expected to provide 4.7
times final pay, leaving employees responsible for accumulating the
remaining 11 times final pay from other sources such as
company-provided plans and personal savings. Hewitt’s analysis,
which examined the projected retirement levels of more than 2
million employees at 84 large U.S. companies2, reveals that just 18
percent of employees who contribute to a defined contribution plan
and work a full career are expected to achieve this goal. On
average, these employees are on track to accumulate 13.3 times
their final pay (including Social Security) leaving a shortfall of
2.4 times pay. In other words, they’re expected to meet just 85
percent of their financial needs in retirement. Nineteen percent
are expected to have a shortfall of five times final pay or more at
retirement.
The situation is much bleaker for employees who are not covered
by a defined benefit plan. On average, workers who rely solely on a
defined contribution plan to fund their retirement are projected to
meet just 74 percent of their needs in retirement—compared to 91
percent for employees who are also covered by an active or frozen
defined benefit plan.
“Employees have been able to recoup a good portion of the
retirement assets they lost due to market volatility, but
unfortunately most workers are still falling significantly short of
meeting their retirement needs,” explains Rob Reiskytl, Hewitt’s
leader of Retirement Plan Strategy and Design. “This is a wake up
call for employees. While retirement may be a long way off, workers
need to start actively saving or be prepared to dramatically reduce
their overall spending in retirement. Ultimately, they’re in
control of most of the elements that will help determine their
retirement outcomes.”
What Can Employees Do To Curb the Savings Shortfall?
Eliminating their savings shortfall may seem like a daunting
task for most Americans. However, Hewitt’s analysis revealed that
workers can significantly improve their situation by making a few
small adjustments:
Start saving: According to recent Hewitt research3, 26
percent of eligible employees currently do not contribute to a
defined contribution plan. Hewitt projects these workers will have
saved, on average, less than half of what they will need by the
time they reach retirement age. But workers who start investing at
a young age and at a robust rate can reduce their shortfall.
Hewitt’s analysis shows that a 25-year-old employee who makes
$30,000 a year is expected to meet all of his/her retirement needs
if he/she contributes, on average, 11 percent of his/her pay each
year throughout their career (assuming he/she also receives an
additional 5 percent employer contribution to his/her defined
contribution account). If an employee waits until age 40 to join
his/her defined contribution plan, he/she needs to save an average
of 17 percent of pay per year.
“It’s a common perception that saving 10 percent of pay toward
retirement throughout your career will get you where you need to be
in retirement,” said Reiskytl. “Unfortunately, that old rule of
thumb is no longer true given the general erosion of
employer-provided retirement benefits and the reduction in
employers providing subsidized retiree medical plans.”
Regularly increase your contribution rate: Hewitt’s
analysis reveals that many workers who commit to increasing their
retirement contributions by as little as 1 percent each year for
five years will be on track to meet most of their financial needs
in retirement. Under this savings rate escalation scenario, the
number of employees in Hewitt’s study expected to retire with
sufficient retirement assets doubles from 18 percent to nearly 38
percent, and almost a third (32 percent) will have a shortfall
between one and two times pay. In other words, a total of 70
percent of employees are projected to have a shortfall of two times
pay or less at age 65, making retirement income adequacy within
reach for a significant number of employees.
For example, on average, a full-career, contributing employee
who saves 7.3 percent of his/her pay and whose employer contributes
5 percent of pay to his/her defined contribution account is on
track to meet 13.3 times his/her final pay in retirement—a
shortfall of 2.4 times final pay. If that employee increases
his/her contribution by 1 percent each year for five years and
maintains this elevated savings rate, he/she will have reduced the
savings shortfall to only 0.6 times final pay, accumulating 15.1
times his/her final pay retirement. “Small increases in saving
levels can have a very positive impact on retirement income
adequacy for employees of all ages,” said Reiskytl. “Many employers
make it easy for their workers to accomplish this goal by offering
tools like automatic contribution escalation, which enables
employees to automatically increase their contribution rate each
year without having to proactively take action.”
Work longer: According to Hewitt’s analysis, employees
who delay retirement to age 67 can significantly reduce their
savings shortfall. For these workers, retirement needs drop from
15.7 times final pay to 14.4 times final pay. At the same time,
their retirement resources increase from 13.3 times final pay to
14.2 times final pay, enabling them to meet 98 percent of their
retirement needs.
“Workers who put off retirement for just two years have a much
greater chance of retiring comfortably,” explains Reiskytl. “Social
Security benefits are increased, there’s more time to accumulate
retirement savings, and assets will be withdrawn for a shorter
period of time. In addition, workers can continue to receive health
care coverage under their employer—which can save employees a
significant amount of money during that time.”
About Hewitt Associates
Hewitt Associates (NYSE: HEW) provides leading organizations
around the world with expert human resources consulting and
outsourcing solutions to help them anticipate and solve their most
complex benefits, talent, and related financial challenges. Hewitt
works with companies to design, implement, communicate, and
administer a wide range of human resources, retirement, investment
management, health care, compensation, and talent management
strategies. With a history of exceptional client service since
1940, Hewitt has offices in more than 30 countries and employs
approximately 23,000 associates who are helping make the world a
better place to work. For more information, please visit
www.hewitt.com.
1 Sources of retirement income include Social Security,
employer-provided defined benefit and defined contribution plans
and employee savings
2 Large companies in the Real Deal study have a median of
approximately 15,000 employees.
3 Hewitt’s 2010 Universe Benchmarks Study
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