Current levels of social security plus 401(k) savings could be enough for most employees: EBRI

Current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most employees with an annual income of at least 60% of their pre-retirement pay on an inflation-adjusted basis, according to a new analysis by the Employee Benefit Research Institute (EBRI).

Assuming current Social Security benefits are not reduced, the EBRI found that between 83% and 86% of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with Social Security retirement benefits, will be able to replace at least 60% of their age-64 wages and salary on an inflation-adjusted basis.

When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, 73–76% of these workers will still meet that threshold, relying only on 401(k) and Social Security combined, the EBRI found. At an 80% replacement rate, 67% of the lowest income quartile will still meet the threshold.

Auto enrollment a plus

Additionally, the EBRI found that when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1% automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88–94% at a 60% replacement threshold; 81–90% at a 70% threshold; and 73–85% at an 80% threshold.

Impact of social security

However, Jack VanDerhei, EBRI research director and author of the analysis, notes that Social Security benefits are an integral component of retirement income security, particularly for lower income workers.

“If, for example, we assume that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile—which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59% to 50%.”

Source: EBRI press release, January 22, 2014.

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