A recent study on retirement savings serves up some sobering news for employees
who are not contributing to their 401(k) plans: it is likely that they will
be able to replace as little as 52 percent of their annual preretirement income
when they retire.
The study by Hewitt Associates reports that 30 percent of employees surveyed
were not contributing to their 401(k)s. The good news is that employees who
are contributing to their 401(k) plan can expect to replace 98 percent of their
preretirement income, through a combination of 401(k), pension, and Social Security
income, according to the study.
The study acknowledges that while retirees generally pay less in taxes and
don't need to set income aside for savings, they still need sufficient income
to cover inflation and medical costs during their retirement.
"The typical employee pays 25 percent of his or her personal healthcare
costs, such as premiums, while the typical retiree pays 50 to 100 percent. For
low-wage workers without subsidized retiree medical coverage, medical costs
can increase the income required for retirement by a substantial amount,"
said Lori Lucas, director of Hewitt's participant research. "We think it's
critical to raise awareness among employees about the escalating need to save.
Companies can help by offering features in their 401(k) plans that encourage
employees to save more--for example, offering an option to automatically increase
contribution levels over time."
Hewitt also recommended that employers encourage employees to begin saving
as early as possible--and by increasing contributions to their 401(k) as often
as possible. The study notes, for example, that employees younger than 25 who
contribute to their 401(k) plan, can boost income replacement levels by more
than 17 percentage points by saving an additional 2 percent of pay in their