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August 23, 2002
Even 80% of Income Isn't Enough for Retirement
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inished performance of 401(k) plans shouldn't be the only concern of workers planning for retirement.

Most employees also aren't aware that they may need as much as 105 percent of pre-retirement income to maintain living standards, warns Watson Wyatt, based on its new Retirement Income Target (RIT).

Watson Wyatt says that unlike many other savings models, its RIT tool accounts for early retirement, inflation, and rising medical costs that can decimate savings as retirees age.

The RIT tool "challenges the popular belief that retirees need only 70 to 80 percent of pre-retirement income to maintain living standards," said Eric Lofgren, global director of Watson Wyatt's benefits consulting group. "The old assumptions are dangerously false, especially when people are retiring younger and living longer."

Retirement age is the biggest factor in determining how much income a retiree needs. The typical 70-to-80-percent savings target assumes retirement at age 65, but income needs can be much larger for the significant number of workers who retire early, and the RIT tool takes this into account.

"Higher savings targets are even more critical for employees retiring at lower wage levels," adds John Steele, senior consultant with Watson Wyatt. "That's because medical costs are about the same regardless of income levels, eating up a higher percentage of smaller pension checks. Lower earners also have lower average savings over their careers."

The RIT tool is designed primarily to help employers determine if their current retirement program provides adequate opportunity for employees to sustain their standard of living in retirement. It also helps define retirement income targets, which can aide in communication and education for employees. The tool is easily customized for most types of defined benefit, defined contribution and post-retirement medical plans. Results, which are shown graphically, also incorporate Social Security and personal savings.

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