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Hewitt Study Highlights Squeeze on Retirement Savings; Trends Demand Education and ActionPosted by Randy on: 2005-12-05 16:06:24 in category:
Retirement Headlines [ Print | Permalink / 0 Comment(s) ] Hewitt Study Highlights Squeeze on Retirement Savings; Trends Demand Education and Action LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Nov. 28, 2005--A recent study by Hewitt Associates, a global human resources services firm, found that employees who do not contribute to their 401(k) plans can expect to replace as little as 52 percent of their annual preretirement income when they retire--well short of an average retiree's income needs. This is a sobering figure, particularly when the majority of employees who don't contribute to their 401(k) plan may need to replace as much as 125 percent of their preretirement pay to meet their income and medical needs when they retire. In other words, employees' retirement income could fall short of their projected needs by as much as 73 percentage points. Nearly a third of employees (30 percent) in Hewitt's study indicated they do not contribute to their 401(k)s. In contrast, employees who do contribute to their company's 401(k) plan can expect to replace nearly all--98 percent--of their annual preretirement income, through a combination of 401(k), pension and Social Security income. "People's retirement income levels are very quickly eroded if they aren't actively saving for retirement--and that's true even if workers have access to income from pension plans and are covered by rich retiree medical plans," said Lori Lucas, director of Hewitt's participant research. Hewitt's study, "Total Retirement Income at Large Companies: The Real Deal," evaluated more than 65 large U.S. employers and 1.8 million employees, assessing projected retirement income adequacy given actual savings patterns. 401(k) Contributors Need to Step Up Savings Hewitt's study also raised some concerns for employees who currently contribute to their company 401(k) plan. If their company offers a 401(k) plan, without the added support of a pension plan or retiree medical subsidy, they may not be on track for retirement. In fact, even if they are actively contributing to their 401(k), they could face a retirement income shortfall of nearly 27 percentage points. "Pension cost volatility and soaring health care costs are putting more companies in a situation where they can only afford to offer 401(k) plans as their retirement vehicle, yet many of their workers are not responding by stepping up their savings in these plans," said Allen Steinberg, a retirement and financial management consultant with Hewitt. The good news is that even modest changes in savings behavior can help employees close the retirement savings gap. For example, an average employee who contributes to his or her 401(k), but doesn't have a pension plan or retiree medical subsidy, can reduce his or her retirement income shortfall to less than 5 percentage points by retiring two years later (at age 67) and contributing 2 percent more per year to his or her 401(k) than the average 8 percent of pay. Medical Costs Raise Income Needs Hewitt's study assumes that an "adequate" retirement income supports a standard of living in retirement that is consistent with income levels when people are actively employed. Though retirees may expect to pay less in taxes and will no longer need to earmark a portion of their income for savings, they will need sufficient income to cover inflation and medical costs during their retirement. "The typical employee pays 25 percent of his or her personal health care costs, such as premiums, while the typical retiree pays 50 to 100 percent. For low-wage workers without subsidized retiree medical coverage, medical costs can increase the income required for retirement by a substantial amount," said Lucas. "We think it's critical to raise awareness among employees about the escalating need to save. Companies can help by offering features in their 401(k) plans that encourage employees to save more--for example, offering an option to automatically increase contribution levels over time." Early Retirement Moves out of Reach Hewitt's study indicates that most employees cannot afford to retire before the age of Medicare eligibility (age 65). For employees currently contributing to their 401(k) plan, early retirement can mean a retirement income shortfall of as much as 31 percentage points relative to what such employees may need in retirement. For employees who fail to contribute, early retirement can produce a shortfall as high as 88 percentage points. "Projected retirement income is lower with early retirement--while projected retirement needs are greater due to a longer lifespan and costly medical coverage prior to Medicare eligibility. This just means that many people will need to consider retiring later, rather than earlier," stated Steinberg. "Alternatives such as phased retirement are likely to become increasingly attractive to employees." Strategies to Strengthen Savings The longer employees can save additional funds, the greater the impact on their retirement income. For employees younger than 25 who contribute to their 401(k) plans, saving an additional 2 percent of pay in their 401(k) annually can boost income replacement levels by more than 17 percentage points. Mid-career employees can boost income replacement levels by 4 to 6 percentage points, moving closer to an adequate retirement income. In addition, deferring retirement by two years increases employees' retirement income levels by approximately 14 percentage points, regardless of whether they contribute to their 401(k). However, many employees retire earlier than expected, due to illness or job layoffs. Beyond saving more and retiring later, employees should consider the following strategies to help them save for retirement. -- Improve investment diversification. Heavy concentrations in company stock can lead to devastating losses in 401(k) portfolios, yet the average 25-year-old with company stock has 43 percent of his or her 401(k) balance in company stock. Those with no company stock tend to have less equity exposure than might be generally recommended. By improving diversification or assuming more risk levels, a 25-year-old can improve his or her retirement income replacement by as much as 20 to 25 percentage points. Third-party investment advice, investment guidance and premixed portfolios also can help. -- Avoid high fees, when possible. Retail mutual funds charge, on average, more than two and a half times the expenses of privately managed, commingled funds. When rolling over money, consider the fact that investing in retail mutual funds outside of plan-provided funds can reduce retirement income by nearly one-fifth over the long term. Leaving assets in such mutual funds after retirement exacerbates savings erosion. -- Preserve 401(k) savings in job transitions. Hewitt's study finds that mid- and late-career hires may be positioned less advantageously for retirement than employees with a full career of participation in their current employer's retirement programs--even when outside assets such as prior 401(k)s and IRAs are taken into account. This may be attributable to the tendency of many workers to cash out their 401(k) savings upon termination rather than preserving these assets for retirement. Employees should preserve even small balances for retirement, particularly when job changes are frequent. -- Save early, save often. More than half (54 percent) of employees in their 20s do not actively save in their 401(k) plans, which causes them to lose the value of their 401(k) savings that compounds over time. Employees should build their retirement nest egg by saving as soon and as much as possible. About Hewitt Associates With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visit www.hewitt.com. Contacts Hewitt Associates Kelly Zitlow, 847-442-7664 kelly.zitlow@hewitt.com or Kristen Polich, 847-442-7648 kristen.polich@hewitt.com Open community website http://www.business-business.biz http://www.investment-investment.us http://www.retirement-retirement.com Recommended sites Open community website http://www.business-business.biz http://www.investment-investment.us http://www.retirement-retirement.com Recommended sites To design your custom retirement plan. http://www.retirement-plan.us For planning an IRA rollover this is the site to review. http://www.ira-rollover.us For professional asset allocation and the wonders it can do. http://www.asset-allocation.us Managers selected to fit your needs. http://www.money-managers.us |
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