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"Employees May Need to Work Longer, Save More for Retirement"
"LINCOLNSHIRE, Ill. -- Recent retirement trends, including reduced retiree medical benefits and the erosion of pension plans, are likely to significantly impact the amount of money employees need to save in order to retire comfortably, according to a new study by Hewitt Associates, an employee outsourcing and consulting firm.Industry research and government studies have shown that workers need to have enough in total retirement resources -- including Social Security and their own savings -- to provide an annual income equal to roughly 85% to 95% of their pre-retirement income.Hewitt's study, which examined the projected retirement income levels of nearly one million employees at 62 large U.S. companies, shows a very mixed picture regarding employees' ability to meet these goals, as retirement income levels are heavily influenced by the employer programs available and by employees' actions. Those employees covered by the study who have an employer-sponsored pension plan and participate in a 401(k) plan will, on average, be projected to replace 107.9% of their pre-retirement income at retirement.However, Hewitt's projections show that those employees who participate in a 401(k) plan but do not have an employer-sponsored pension plan are likely to be less prepared, replacing only 80% of their pre-retirement income when they retire.The situation is substantially worse for those eligible employees who are offered only a 401(k) plan and choose not to participate. Hewitt's study shows that at a typical large company, 401(k) plans are projected to provide more than half (51.4%) of the retirement income available to employees, yet more than 30 % of eligible employees do not currently participate in their 401(k) plans."This is a wake-up call for employees," said Lori Lucas, director of participant research at Hewitt Associates. "Many workers still look at retirement in the traditional sense -- retire at age 65 or earlier with a comfortable nest egg: a pension, 401(k) savings, Social Security and retiree health care benefits. They don't realize that new retirement trends will severely impact this picture and shift much more responsibility to them to prepare and save for their retirement."The study also looked at the impact of retiree medical costs on retirement income by examining projected retiree medical costs under three scenarios: high retiree medical subsidies from employers, moderate retiree medical subsidies and no retiree medical subsidies.According to the study, retiree medical costs may consume an annual amount equal to 20% of pre-retirement income for those employees who retire at age 65 with no employer subsidy. The impact of retiree medical decreases to as little as 5% of pre-retirement income for those employees who retire at age 65 with a high employer subsidy. In other words, employees who have otherwise replaced 100% of their preretirement income but have no retiree medical subsidy must use approximately 20% of their retirement income to cover their retiree medical costs.The picture is more serious for employees who -- by choice or otherwise -- retire early. Because of the high cost of medical coverage before Medicare eligibility, a typical worker retiring at age 62 who does not have any subsidized retiree medical benefits is projected to replace only 59% of their pre-retirement income."Increasing health care costs are forcing more and more employers to cut or eliminate medical benefits for future retirees," said Lucas. "Even if a company currently offers retiree medical benefits, that may not be the case for future retirees. Employees need to anticipate the potential cost of paying for much of their retiree medical themselves and take steps -- whether it's saving more or working longer -- to ensure they have enough savings to retire."With ongoing legislative, regulatory, financial and legal uncertainty surrounding pension programs, the number of employers offering defined benefit plans continues to decline. According to other Hewitt research, only 68% of employers offered defined benefit plans in 2003, down from 85% in 1990, and Hewitt anticipates that this percentage will continue to drop.Given their current saving and investment patterns, workers who must rely entirely on their 401(k) plans and Social Security to pay all their retirement expenses must plan for retirement much more carefully. If these employees have to pay the full cost of retiree medical benefits, they are projected to be left with only about 57 % of their preretirement income -- much less than those employees offered programs incorporating other retirement benefits like pension plans or retiree medical subsidies."Employees need to make their 401(k) programs work harder for them," said Lucas. "These benefits are no longer just an added perk -- they're becoming the main vehicle for providing many employees with an adequate amount of income at retirement."Retiring at 67 -- just two years later than the traditional expected retirement age -- and contributing an additional 2% of savings to a 401(k) plan can provide a significant boost to retirement income of employees and may be a particularly important strategy for employees who do not have a pension plan or subsidized retiree medical coverage, the study found. In doing so, half of employees in this situation may achieve replacement income rates in excess of 80% -- even after they have paid their retiree medical costs. The difference among younger workers is most marked under this scenario, with the increased savings growing over time."Workers are not being asked to do the impossible, but they will have to have more realistic retirement expectations, save more and invest better," said Lucas. "For example, something as simple as investing in cost-effective investment funds can make the difference between retirement adequacy and inadequacy."Additional annual expenses of 0.89% -- the difference between the typical institutional fund and retail mutual fund portfolio -- can reduce projected retirement income adequacy substantially over time. For younger and less- tenured employees, higher costs can erode 401(k)-related retirement income levels by nearly one-fifth through retirement age. "High fees can reduce an employee's retirement savings even further if the employee leaves his or her assets in a retail mutual fund after retirement and continues to pay these fees for an extended period of time beyond retirement age," Lucas said.Visit Hewitt Associates: www.hewitt.com"