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New study paints a rosy retirement picture

Can you survive on your 401k and Social Security benefits? It may not be as hard as you thought.

By Money Staff Feb 5, 2014 3:27PM

This post comes from Daniel Bortz at partner site The Fiscal Times.

While some financial forecasts paint a grim picture for pre-retirees, new research offers a slightly rosier outlook: 401k benefits and Social Security might actually be enough to support you.

Ccouple wrapped in blanket © Ariel Skelley, Blend Images, Getty ImagesThat's what the Employee Benefit Research Institute (EBRI) concluded in a recent study. The group found that 85 percent of workers with over 30 years of eligibility in a 401k will be able to replace at least 60 percent of their wages and salary earned at age 64, combined with their Social Security benefits. That's on an inflation-adjusted basis and assumes current Social Security benefits aren’t reduced.

That estimation, however, doesn't account for a number of variables -- including how workers handle their 401k plans. "The study paints a very rosy picture," said Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. Simply put, having access to a 401k doesn't mean workers are actually going to make contributions.

Plus, the chances of Social Security benefits staying the same are slim, given that the Social Security system continues to pay out more than it takes in, according to the 2013 Trustees Report on Social Security. The report also claims that the Social Security fund for retirees is on track to become insolvent in 2033.

The perks of automation

Many Americans who have access to a 401k aren't using the accounts to their full advantage. "It’s all about behavioral economics," said Jack VanDerhei author of the EBRI study. "[Success] is based on how much you decide to contribute, whether or not you roll the money over from one employer to the next, and whether you withdraw money prematurely."

To give workers a push, more employers are implementing auto-enrollment systems for 401k plans. "Americans are procrastinators," said Catherine Collinson, president of the Transamerica Center for Retirement Studies. "By having an automated contribution system in place, as opposed to one where employees have to opt-in, workers are more likely to save a percentage of their monthly income." But some companies instituting automated systems are applying them only to new hires, so older workers should check how their plan is set up.

Andrea Blackwelder, a financial planner and president of Wisdom Wealth Strategies in Denver, said workers who set up automated increases for their 401k contributions -- even just 1 percent more each year -- are on track for a brighter retirement. "It’s a tough sell to sit down with someone and tell them that 60 to 70 percent of their pre-retirement income is enough to support their 'golden years' goals, like traveling around the world," said Blackwelder.

More competitive plans

The benefits of 401k savings have led many job seekers to look at employer-sponsored retirement plans when evaluating job openings. In response, companies are offering more competitive plans: A 2013 survey by benefits consultant Aon Hewitt of more than 400 plan sponsors found that one in five employers offers a one-to-one match on the first 6 percent of employee deferrals, up from one in 10 plan sponsors in 2011. The survey also found that for 77 percent of the employers, defined contribution programs such as 401k plans are the primary source of retirement income for their employees.

"There was a period after the recession where a lot of employers suspended their employer match, at least temporarily," says Gary Koenig, director of economic security at AARP's Public Policy Institute. Fortunately for American workers, the pendulum has recently swung back the other way.

The challenge of job moves. Careers with uninterrupted contributions to 401k plans are rare today, since workers change jobs frequently. The average worker holds 11 jobs from ages 18 to 46, according to a 2012 study by the Bureau of Labor Statistics.

For employees who work continuously but change jobs often, there is usually a wait period of several months for new employees before 401k eligibility applies and a minimum tenure required for full vesting.

Things are much tougher, of course, for those unable or unwilling to work continuously. "When people are in between jobs, it's not only a break in income but also a break in a person's ability to save," says Collinson, adding that more women take time off to be a new parent than men and are consequently less likely to make consistent 401k contributions.

Preparing for the unexpected

Of course, consistent savers aren't guaranteed a financially stable retirement when you factor in unanticipated expenses, like those resulting from a health crisis. Plus, the average worker is carrying more debt into retirement. According to a survey last year by Securian (.pdf file), 67 percent of pre-retirees expect to carry mortgage debt into retirement, compared to 30 percent in 2009. On a grander scale, 36 percent of those surveyed said they believe their finances in 2014 will be "upside down," meaning their debt will be greater than their savings and investments.

There's also the issue of poor money management. "Even if people have enough income in retirement, how you manage those assets in retirement is what matters," Koenig says.  It's an all-too-common event to see retirees simply run out of money.

Many financial planners advocate that workers aim to have 70 percent to 80 percent of pre-retirement income, which would reduce their chances of having enough money in retirement to around 60 percent, according to the EBRI study. But it's difficult to know exactly what a retiree’s income needs will be. "You're no longer saving for retirement, no longer spending money on work expenses, and you could be in a lower tax bracket," VanDerhei says.

When the 401k is not an option

If employers don’t offer a 401k plan workers must actively seek retirement plans on their own, including IRAs and annuities. In his State of the Union speech last week, President Obama said he’s offering a new option for workers without access to a 401k: the MyRA savings vehicle.

The details still haven't been released, but the program will allow workers to set aside small amounts of money in a savings bond-like account that would convert to an IRA once it accumulates $15,000.

Meanwhile, there are upsides to living expenses in retirement says EBRI’s VanDerhei. "You're no longer saving for retirement, no longer spending money on work expenses, and you could be in a lower tax bracket."

More from The Fiscal Times

Feb 5, 2014 8:03PM
"The group found that 85 percent of workers with over 30 years of eligibility in a 401k will be able to replace at least 60 percent of their wages and salary earned at age 64, combined with their Social Security benefits."

Social Security, according to the bar graph at, pays about 33% of working income for those retiring at 65.

That means this group "found" that 401k's will supply the other 27%, in other words 81.8% as much as Social Security.

The same link I referenced above says average "Social Security protection is equivalent to a life insurance policy with a face value of $476,000."

That means that at age 65, the average person needs $389,000 in a 401k to supply 81.8% as much as Social Security.

How much does that average 65 year-old 401k owner have in that 401k?
For the average person, retiring at 65 with a $60K to $80K income, the median average 401k contains $170,000.

That's less than half the amount needed to generate 60% of working income.

I wonder if the Wall St. crooks who skim 60% of the earnings from 401k's in fees during working years without risking a cent of their own sponsored this "study"?
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