EBRI research director Jack VanDerhei found that 86 percent of low-income people with 401(k) plans are doing what they need to do with those accounts to eventually cover a basic bare-bones retirement. In the highest-income group, 83 percent are on course.
The EBRI think tank used a database of 24 million Americans with 401(k) plans and assumed their saving practices will continue for 30 years. Also, those who appear on course will have only enough for basics like food, housing and heat — nothing extra. To provide that kind of retirement, a person puts away enough over a lifetime of savings in a 401(k) to replace 60 percent of what they were earning annually on the job at age 64.
VanDerhei said Americans with 401(k) plans are doing better in building savings now than they were years ago because after 2006, many employers began to provide target date funds — an easy way for people to invest money without being overly cautious or overly risky based on their age. People choose a fund with the year they will retire in the name. Then fund managers invest a lot in stocks when people are young, and as the person ages, they reduce risks by investing less in stocks and more in bonds.
The people who have been pushed by employers through automatic contributions to 401(k) plans are the best positioned for their future. According to the EBRI research, 94 percent of low-income workers and 88 percent of the highest-income quartile with the activist employers will be able to replace 60 percent of their income in retirement. About 85 percent of lower-income people and 73 percent of higher-income earners will be able to replace 80 percent of their pay in retirement.
The analysis from the Washington, D.C.-based Employee Benefit Research Institute (EBRI) finds that, assuming current Social Security benefits are not reduced, 83% to 86% of employees with more than 30 years of eligibility in a 401(k) retirement plan could have sufficient funds to replace at least 60% of their age-64 wages and salary.
When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, the analysis finds that 73% to 76% of the employee set will still meet that threshold through 401(k) assets and Social Security payments combined. At an 80% replacement rate, the analysis finds that 67% of the lowest income quartile will still meet the threshold if they have had 30 years of access to a 401(k).
Automatic enrollment in 401(k) plans can also play a role in successful saving for retirement. The EBRI analysis examines auto-enrollment with an annual 1% automatic escalation provision and empirically derived opt-outs, and finds that the probability of success increases substantially for employees in those plans, as follows:
- Between 88% and 94% could potentially achieve 60% threshold;
- Between 81% and 90% could achieve a 70% replacement threshold; and
- Between 73% and 85% could achieve an 80% threshold.
EBRI notes that the use of auto-enrollment as a plan feature has grown significantly since the enactment of the Pension Protection Act of 2006.
With regard to Social Security benefits, Jack VanDerhei, EBRI research director, says that such benefits are an integral component of retirement income security, particularly for lower income workers.
VanDerhei, who is also the author of the analysis, explains, “If we assume, as an example, that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile—which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59% to 50%.”
The combination of Social Security benefits and 401(k) savings will provide most people with at least 60% of their inflation-adjusted pre-retirement annual income, according to the analysis by the nonpartisan Employee Benefit Research Institute.
More than four in five American workers – between 83% to 86% – are likely to generate 60% or more of their pre-retirement income, the study calculates.
Between 73% to 76% of people will achieve 70% of pre-retirement income, according to the analysis.
Though opinions vary, a general rule of thumb is that workers need about 70% of pre-retirement income to live fairly comfortably in retirement.
The EBRI study covers people who are eligible for 401(k)s, not simply those who actually participate. But about 73% of workers with access to 401(k) plans take part in them, according to EBRI.
The ability to generate 60% to 70% of pre-retirement income is encouraging considering the often bleak retirement statistics in many other analyses.
“I would think that’s a very different message – a more optimistic message – than has been conveyed” in other studies, said Jack VanDerhei, EBRI research director.
Jack VanDerhei, research director for EBRI, a Washington nonprofit, analyzed data on how early baby boomers invest to estimate how their portfolios would fare in different interest-rate scenarios.
If interest rates, after adjusting for inflation, stay where they are, about 52% of early baby boomers will run short of money in retirement, according to his analysis.
On the other hand, if interest rates jump by two percentage points, only 44.5% of the same group of early-boomer investors will run short, the analysis found.