A new set of age-based benchmarks are intended to help employees save at least eight times their final salary in order to meet basic income needs in retirement—well above what most employees are on course to save.
"While every individual’s situation will differ greatly based on desired lifestyle in retirement, average workers may replace 85 percent of their pre-retirement income by saving at least eight times their salary," according to the analysis, released by Fidelity Investments, a provider of retirement plan management services.
To reach the 8-times-salary level by age 67, Fidelity said employees should aim to save:
• The equivalent of their annual salary in savings by age 35.
• Twice their salary by age 40.
• Four times' salary by age 50.
• Five times salary by age 55.
• Six times salary by age 60.
Along similar lines, an Aon/Georgia State University income replacement ratio study suggested that, along with Social Security, a worker earning $50,000 at retirement will need to replace 81 percent of that amount annually to continue the same standard of living, while a worker earning $150,000 at retirement will need to replace 84 percent of that salary to continue the same pre-retirement standard of living.
Many employees are not saving nearly this much, and the need to defer more into their defined contribution plan—beyond the employee match limit—is a key point to communicate when providing retirement planning information, according to many retirement advisors. Moreover, two factors that have the greatest impact on retirement savings over time are starting early and saving consistently, retirement specialists point out.
Fidelity's savings benchmarks are based on saving for retirement beginning at age 25, working and saving continuously until 67 and living until 92. The ending goal would include savings in qualified retirement accounts such as 401(k)s and IRAs, as well as other outside savings. The guidelines make the following assumptions:
• The employee makes continuous annual salary contributions to a workplace plan beginning at 6 percent and escalating 1 percent per year until 12 percent, plus receive an ongoing 3 percent annual employer contribution during their career.
• The lifetime hypothetical average annual portfolio growth rate is 5.5 percent.
• Social Security payments are factored into the replacement income ratio of 85 percent.
• The employee’s income grows by 1.5 percent per year over general inflation with no breaks in employment or savings.
Meeting the Match Is Not Enough
An average 401(k) plan offers an employer match of 50 percent of the employee's contribution up to 6 percent of the employee's salary, prorated by paycheck. The match threshold "serves as a natural reference point when individuals are deciding how much to save, and may be viewed as advice from the savings program sponsor on how much to save," Brigitte C. Madrian, a professor of public policy and corporate management at the Harvard Kennedy School of Government, wrote in a July 2012 report on matching contributions and savings outcomes.
However Dallas Salisbury, president of the not-for-profit Employee Benefit Research Institute (EBRI), earlier this year told SHRM Online that current savings rates are far too low ensure adequate retirement income for most employees. He highlighted the importance of employers “providing automatic payroll deduction at an average of 15 percent of pay into a savings program for every worker, from day one of employment. Workers must then add more with every increase in income. Those who start at age 35 instead of 20 will have to defer more like 25 percent on average for the rest of their working years,” Salisbury contended.
As is readily apparent to HR benefits managers, these amounts are far higher than the typical employee savings deferral rate. According to EBRI, the average employee contribution to a 401(k)-type plan is just 7.5 percent of annual earnings for workers who report making a contribution.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Posters, Fliers Available for '401(k) Day' Campaign, SHRM Online Benefits, September 2012
Work to Age 70? For Many, That Won’t Be Enough, SHRM Online Benefits, September 2012
Tailor Your Retirement Planning Messages, HR Magazine, September 2012
401(k) Match: Higher 'Thresholds' Drive Participation, SHRM Online Benefits, July 2012
Encourage Employees to Defer Adequate Pay to 401(k)s, SHRM Online Benefits, May 2012
SHRM Online Benefits Topics & Strategy
SHRM Online Retirement Plans Resource Page