It’s well known that most employees aren’t on track to maintain their current standard of living in retirement. The typical U.S. employee will need to accumulate 15 times his or her final pay using a combination of Social Security, pensions, retirement accounts, and other savings in order to retire comfortably, according to Hewitt Associates calculations released today. That number jumps to 15.7 times final pay when inflation and retiree medical costs are factored in.
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Social Security alone is expected to provide 4.7 times final pay for most people over their lifetime, Hewitt calculated. Employees must come up with 11 times their salary on their own and using company-sponsored retirement plans. But most workers aren’t on track to save that much. Only 18 percent of employees who contribute to a 401(k) throughout their entire career are expected to accumulate 11 times their final salary before retirement, according to Hewitt’s analysis of over 2 million employees at 84 large companies. The typical worker in the study is on track to replace 13.3 times final pay (including Social Security), which would mean they will only have 85 percent of what would be needed to maintain their current lifestyle in retirement. Workers with only a 401(k) or similar type of retirement account are projected to meet just 74 percent of their financial needs in retirement, compared to 91 percent among employees who are or were enrolled in a traditional pension at some point during their career.
However, there are some fairly painless ways to make sure you are on track to meet your income needs in retirement. Here are three relatively easy ways to increase your chances of accumulating 11 times your final pay before retirement.
Start young. Workers who start saving for retirement at a young age are the most likely to be on their way to meeting their retirement needs. For example, a 25-year-old employee who makes $30,000 annually could save enough for an adequate retirement income by saving 11 percent of pay each year throughout his career and earning a 5 percent annual 401(k) match, Hewitt found. If a worker waits until age 40 to participate in a 401(k) he needs to save an average of 17 percent of pay each year to achieve the same results.
Save 1 percent more. Workers who increase their contributions to a retirement account by 1 percent each year for 5 years are more likely to be able to maintain their lifestyle in retirement. Gradually escalating your retirement savings rate would put 70 percent of employees on track to coming reasonably close to producing an adequate retirement income, Hewitt found. “Small increases in saving levels can have a very positive impact on retirement income adequacy for employees of all ages,” says Rob Reiskytl, Hewitt’s leader of retirement plan strategy and design. “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 2 years longer. Delaying retirement packs the double punch of giving you more time to save and reducing the amount you must accumulate. Postponing retirement until age 67 drops the amount of savings you need from 15.7 times final pay to 14.4 times your last annual salary. “Workers who put off retirement for just two years have a much greater chance of retiring comfortably,” says 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.” The typical employee at the large companies Hewitt studied is on track to replace 14.2 times final pay if current savings habits are maintained and they work until age 67. That means many people would be able to meet 98 percent of their future retirement needs simply by delaying retirement.