Employee EngagementRecognition & Rewards

Retirement Savings Fall Short In Light of Market Downturn

Study finds workers need to save more or work longer before retirement as a result of declining stock market.
by Debbie Bolla
The severity of the stock market decline is putting a deep hindrance on the prospect of retirement for U.S. employees. A new research study by global HR consulting and outsourcing company Hewitt Associates shows that the total amount of money needed to retire has increased considerably due to heightened inflation and healthcare costs.

According to Hewitt, which examined the projected retirement requirements of nearly two million employees at 72 large U.S. companies, most were saving enough money to replace 85 percent of their income at retirement through account drawdowns. However, it’s anticipated that they will now need 126 percent of their income to maintain the same standard of living at retirement. Factoring in the recent economic downfall in which the average 401(k) account has decreased 18 percent during 2008, employees are further falling short of their required savings. In fact, average portfolio values have decreased to allow drawdowns of just 81 percent of at-retirement income, increasing the gap by four percent. For example, a 55-year-old employee with a current 401(k) savings rate of 10 percent of pay will need to save an additional 12 percent each year until age 65 or work for two more years to replace what was lost in 2008.

Even before the plunge in share values, the average worker hadn’t been saving enough of his or her salary to retire comfortably, the study found. For example, an average 40-year-old with 10 years of service earning $83,000 at retirement needed to save enough to provide $104,500 a year in retirement income due to a staggering increase in cost of living and healthcare costs, according to Hewitt. However, on average, savings rates allowed a drawdown of just $70,500 annually, creating a $34,000 annual shortfall. By factoring in the current stock market, the difference increases to $37,350 a year, or a total sum of approximately $400,000.

“Most Americans were already far from achieving adequate levels of retirement income before the economy collapsed, and for many, the financial downfall has made reaching these goals nearly impossible,” said Rob Reiskytl, leader of retirement plan strategy and design for Hewitt. “In today’s economy, employees are stretched to their limit.”

Hewitt Associates makes the following suggestions to maximize a retirement plan’s earning potential.

Don’t give up free money.
Contribute the percentage of money that earns the company’s full match. Failure to do so is literally forgoing free money. For instance, an employee earning $50,000 in 2009 can obtain an additional $43,000 per year during retirement if he or she puts away enough each year to receive the full company match. Currently, roughly three percent of all companies have suspended their match. Increase your contribution if possible to make up the difference until the match is

Put Your Plan on Autopilot. According to Hewitt, about 53 percent of employers offer an automatic savings rate escalation in their retirement plans. By automatically increasing your contribution to your 401(k) every year by even one percent, saving rates can increase retirement savings by 50 percent. The difference in each paycheck will seem minimal compared to the reward.

Diversify Your Assets.
Especially during volatile markets, it is very important not to put all of your eggs in one basket. Periodically rebalancing savings into a balanced mix of funds can properly distribute money. Choose target-date funds or use the automatic rebalancing tool. According to Hewitt, 77 percent of employers offer target-date funds and 49 percent offer automatic rebalancing.

Take Advantage of Advice. Seek guidance to suit your individual retirement needs. According to Hewitt, 38 percent of companies provided third-party investment advisory services in 2008 through the Internet and another 43 percent of companies plan to add this tool in 2009. Additionally, 20 percent of companies offer managed accounts, which allocate the overall management of accounts and funds to a financial professional.

Staying abreast of the services and resources offered by your company’s retirement savings plan is a key factor in staying afloat during this financial downturn.

“The key for workers is to keep saving, and to make sure they are using all the tools and resources they have at their disposal to maximize their retirement savings potential. It also means that many employees—particularly Baby Boomers—may have to make some tough decisions about what retirement looks like. They may need to work longer, part-time, or find other ways to supplement income in retirement to make up for the shortfall,” Reiskytl said.  

Tags: Engaged Workforce, HRO Today Global, Performance Management Rewards

Recent Articles