Retirement readiness within reach for Americans who take advantage of 401(k) plans

Americans who have access to 401(k) plans can help to achieve a more secure retirement if they start early and save consistently over the course of their career, according to new research sponsored by Prudential Financial, Inc. (NYSE:PRU).

The findings of the latest National Retirement Risk Index (NRRI), published by The Center for Retirement Research (CRR) at Boston College, are encouraging.

“This latest research shows if saving starts earlier and retirement occurs a few years later, the required savings rate becomes even more achievable,” says George Castineiras, senior vice president, Total Retirement Solutions at Prudential Retirement and one of the authors of the Prudential paper.

The CRR study published today found that for those individuals who have a workplace-based retirement plan, on average, 35 percent of their retirement income should come from a 401(k) or other retirement savings plan. And the average required savings rate to achieve that level of targeted income is 14 percent -- if savings starts at age 35 and retirement occurs at age 65. The research was designed to determine the amount 401(k)s would need to generate for working-age American households to be able to maintain their standard of living in retirement.

“What’s particularly compelling is that this research helps to highlight the strength of the existing retirement system,” said James McInnes, senior vice president of product management and development at Prudential Retirement, the paper’s co-author. “Modern plan design allows individuals to get tax-advantaged savings and the ease of payroll deduction as well as investment education, advice and institutionally priced products to help provide them the opportunity to better prepare for a more secure retirement.”

A new Prudential paper, “Planning for Retirement: The Role of 401(k)s in Retirement Income,” which summarizes the latest NRRI research, notes the improvements to 401(k)s since they were introduced as supplemental savings vehicles in 1978, and also highlights three key features of 401(k) plans that are now helping improve Americans’ retirement security:

• Matching Contributions: Workers can save more and have more incentive to do so when their employer offers a match. The average employer match rate is 2.7 percent.*
• Automatic Enrollment: With this feature, newly hired workers are automatically enrolled in a company’s 401(k) plan at a predetermined contribution rate, unless they opt out.
• Retirement Modeling Tools: These tools, which project future retirement income, can improve savings behavior by increasing savings rates.

“Employers can help their employees achieve their retirement savings goals by ensuring employees take advantage of the employer-match provided, offering automatic enrollment and providing participants with the proper tools,” Castineiras added.

The NRRI model assumes that households start saving at age 35 and retire at age 65. The CRR’s research further found that the required savings rate for an average wage earner in a single income household drops from 15 percent to 10 percent if the individual starts saving at age 25, instead of age 35. When the target retirement age is changed to age 67 -- the retirement age of Social Security for those born after 1959 -- the average required savings rate (starting at age 35) is lowered from 15 percent to 12 percent. When the retirement age is further delayed to age 70, the average rate drops to 6 percent. If approaches are combined, with savings starting at age 25 and retirement occurring at age 70, the required savings rate drops to 4 percent.

“Even small changes in savings behavior can have a positive impact on individuals’ results,” says McInnes. “This research shows it is never too late to start saving and even if you didn’t begin at age 25, saving a little more now or extending retirement can still get you to a comfortable place.”

Saving Rate Required for an Average Wage Earner to Attain a 70 Percent Replacement Rate

Note: The calculations assume a real rate of return of 4 percent and the purchase of an inflation-indexed annuity with the same rate as in the National Retirement Risk Index.
Source: CRR calculations.

Prudential Retirement delivers retirement plan solutions for public, private, and non-profit organizations. Services include state-of-the-art record keeping, administrative services, investment management, comprehensive employee investment education and communications, and trustee services. With over 85 years of retirement experience, Prudential Retirement helps meet the needs of over 4.0 million participants and annuitants. Prudential Retirement has $327.8 billion in retirement account values as of March 31, 2014. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates.

Prudential Financial, Inc. (NYSE:PRU), a financial services leader, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit http://www.news.prudential.com/.

* Profit Sharing Council of America, "PSCA’s 56^th Annual survey of Profit Sharing and 401(k) Plans," p. 23, 2013.

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