Most workers who don’t have access to a company-sponsored, defined-benefit pension plans probably won’t have enough money to support them in retirement, a new study concludes.
That’s true even if their company has a 401(k) plan. Employees need to have enough in total retirement resources–including Social Security and their own savings–to provide an annual income equal to roughly 85 to 95 percent of their pre-retirement income, according to Hewitt Associates, a management-consulting firm.
Hewitt examined the projected retirement-income levels of nearly 1 million employees at 62 large U.S. companies. The study unearthed a mixed picture regarding of employees’ ability to meet the basic retirement-income goals. The reason, according to the firm, is that the amounts amassed by retirees are “heavily influenced” by two factors: the employer programs available to them and the actions by employees themselves.
For example, those employees who have an employer-sponsored pension plan and participate in a 401(k) plan will, on average, be projected to replace 107.9 percent of their pre-retirement income at retirement.
However, those employees who take part in a 401(k) plan but do not have an employer-sponsored pension plan are likely to replace just 80 percent of their pre-retirement income when they retire.
Indeed, Hewitt notes, just 68 percent of employers offered defined- benefit plans in 2003, down from 85 percent in 1990. The firm expects that this percentage will continue to drop.
The retirement outlook is much bleaker for those eligible employees who are offered only a 401(k) plan and choose not to participate.
Hewitt found that at a typical large company, 401(k) plans are projected to provide more than half (51.4 percent) of the retirement income available to employees, yet more than 30 percent of eligible employees do not currently participate in their 401(k) plans.
Hewitt also found that medical costs have a good chance of consuming a large chunk of a retiree’s income. Those who retire at age 65 and receive no health-care subsidy from their employer could wind up spending 20 percent of their total pre-retirement income on medical costs according to the firm. The impact of medical costs on retiree income, however, dips to as little as 5 percent of pre-retirement income for those employees who retire at age 65 with a high employer subsidy.
The picture is more serious for employees who retire early, by choice or otherwise. Because of the high cost of medical coverage before Medicare eligibility, a typical worker retiring at age 62 who does not have any subsidized retiree-medical benefits would replace only 59 percent of his or her pre-retirement income, according to Hewitt.
The firm also warns that workers who must rely entirely on their 401(k) plans and Social Security must plan for retirement much more carefully. If such employees have to pay the full cost of retiree-medical benefits, they would be left with only about 57 percent of their pre-retirement income.
