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December 05, 2005
Study Raises Awareness of Need to Save

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.

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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 401(k) annually.

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