Retirement Savings: How Much Is Enough? Part 2: Good News Not Good Enough

This second blog in a two-part series about retirement readiness discusses whether 401(k)s and Social Security can adequately meet retirement income needs.Part 1looked at the rule-of-thumb numbers cited as guidelines for income replacement in retirement.

The combination of Social Security benefits and 401(k) savings will provide most people with at least 60% of their preretirement annual income, according to a new study by the nonpartisan Employee Benefit Research Institute (EBRI).¹

A more optimistic message

Assuming that current Social Security benefits aren’t reduced, the analysis shows that 83% to 86% of employees with more than 30 years of eligibility in a 401(k) retirement plan could have sufficient funds to replace at least 60% of their age-64 wages and salaries.

When the threshold is raised to 70% replacement of this income — the general, but disputed, rule of thumb for percentage of preretirement replacement income required for a “comfortable” retirement — the study reveals that 73% to 76% of the employees will still meet that standard through 401(k) assets and Social Security payments combined. This conclusion offers “a very different message — a more optimistic message — than has been conveyed” in other studies, said Jack VanDerhei, EBRI research director.

Clouded by caveats

Mr. VanDerhei is right … this is a sunnier result than we’ve seen from most other analyses. Three big caveats, though, are embedded in this message:

• As noted, the study assumes no reduction in current Social Security benefits, an uncertain prospect in light of the controversy surrounding the program.

• EBRI’s analysis is based on 30 years of access to a 401(k) plan and includes all workers eligible for 401(k)s, not just those who actually participate. But it’s likely that those who don’t participate will save less over the long term than those who do.

• Finally, and more importantly, many Americans just don’t have access to 401(k) plans. EBRI pegs the percentage of workers (age 16 and older) who are eligible to join a plan at only 59%. But this figure could be artificially low because it may include part-time and seasonal workers, and some retirement industry sources contend that plans subject to the Employee Retirement Income Security Act, such as 401(k)s, were originally geared toward full-time workers. By contrast, the US Senate Finance Committee staff estimates that close to 80% of workers currently have access to 401(k) plans. Still, either estimate excludes millions of American workers from the EBRI study’s relatively optimistic findings.

Given the pervasive dire predictions about boomers’ falling far short of saving enough, good news on the retirement horizon is a welcome change. But it’s not yet good enough.

1 Source: Employee Benefit Research Institute, “The Role of Social Security, Defined Benefits and Private Retirement Accounts in the Face of the Retirement Crisis,” EBRI Notes, January 2014.

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