Lincolnshire, Ill. — June 12
Stronger market returns and continued retirement savings behaviors by employees over the past few years have helped U.S. workers make progress in closing the gap between the amount of money they need to meet their financial needs in retirement and what they are on track to accumulate, according to two new research reports by Aon Hewitt.
When factoring in inflation and postretirement medical costs, Aon Hewitt projects employees will need 11 times their final pay in retirement resources, such as company-provided plans and personal savings, to meet their needs in retirement beyond Social Security.
Aon Hewitt’s analysis, “The Real Deal: 2012 Retirement Income Adequacy at Large Companies,” which examined the projected retirement levels of more than 2.2 million employees at 78 large U.S. companies, revealed that, on average, full-career contributing employees are on track to accumulate 8.8 times their final pay, leaving a shortfall of 2.2 times pay.
This is a slight improvement over 2010 when the shortfall was 2.4 times pay. Employees who rely solely on a defined contribution plan to fund their retirement are making similar progress, reducing their shortfall from 4.3 times pay in 2010 to 3.8 times pay.
According to Aon Hewitt, two main factors contributed to closing the gap: continued savings by employees and strong return on assets. Aon Hewitt’s “2012 Universe Benchmarks” report, which analyzes the saving and investing habits of more than 3.6 million U.S. employees, shows 76 percent participated in a defined contribution plan during 2011.
While flat recently, this rate remains at a record-high. Participation among younger workers increased by two percentage points since 2009 to 54 percent of eligible workers.
In addition, the median annualized participant rate of return from 2009 through 2011 was a substantial 12 percent.
However, Aon Hewitt’s research shows room for improvement. The average before-tax contribution rate remains nearly unchanged, at 7.2 percent of pay. As a result, less than 30 percent of full-career employees are currently “on track” to achieve adequate retirement income. Passive employee behavior also is at an all-time high, with just 15 percent of participants initiating a trade in 2011, down from 20 percent in 2008 and prior years.
Among factors influencing retirement income adequacy, Aon Hewitt’s research revealed that, not surprisingly employee savings rates have the largest impact. For example, if not covered by a pension plan, an employee who begins saving at age 25 and targets 11 times pay at retirement needs a combined employer and employee contribution rate of 12 percent to 18 percent of pay each year (15 percent on average) to build up adequate retirement income by age 65.
This combined contribution rate increases if the employee does not start saving until later in life.
Aon Hewitt’s analysis shows the number of full-career contributors who can retire with sufficient retirement assets increases from 29 percent to 46 percent if they increase retirement contributions by as little as 1 percent each year for five years.
For an employee making $40,000 a year, this 1 percent increase in contribution rates roughly equates to giving up purchasing one cup of coffee a day for a year.
Source: Aon Hewitt