Here’s What Your Retirement Future Looks Like With Current 401(k) Savings

A recent triennial retirement-adequacy study by consultancy firm Aon revealed that very few full-time employees enrolled in company-provided 401(k) plans are saving enough for a comfortable retirement, and the rest will probably have to work past the age of 65 in order to meet their retirement needs.

A study by Aon gathered data from thousands of 401(k) accounts from the consultant firm’s client companies to reveal that only one out every three employees were on-track for their retirement savings

The Real Deal

The ‘Real Deal’ study by Aon gathered data from thousands of 401(k) accounts from the consultant firm’s client companies to reveal that only one out every three employees were on-track for their retirement savings. The shocking study concluded that some employees don’t contribute to the retirement benefit plan at all, and from those who are enrolled in 401(k), many aren’t consistent with their payments or don’t make enough contributions to get the full match from their employer. This means that most future retirees will either have to work past the age of 65 or lower their retirement expectations to make up for their lack of savings.

But how exactly did Aon come to this conclusion? According to their calculation approach, the researchers assumed that the 401(k) and company-provided pension rights made up all of employees’ retirement savings (therefore disqualifying any additional funds like the IRA or HSA), and that the employees would continue to save at the same rate as they were at the time of collecting the data until their retirement. In case of an auto-escalation retirement plan, the researchers did factor in any yearly increases before deriving a meaningful conclusion.

Falling Behind on Savings

The study also assumed that the workers expect the same standard of living they have now after retirement, but with certain adjustments made to their monthly expenses such change in taxes, medical costs and retirement contributions. With all these assumptions, the researchers arrived at the conclusion that employees will have an average of 8 times their current earnings saved in the retirement accounts by the time they reach the age of 67.

The survey data in the report shows that over the past 10 years, employer contributions to 401(k) retirement funds has gone down from 7.3 per cent to 6.3 per cent of the employee’s salary

However, considering their current living standards, they would require almost 11 times their earnings, creating a 27 per cent shortfall in their savings. This difference in retirement savings was even more apparent in women who were likely to save 36 per cent less than what they would actually need in their golden years, whereas men were only 22 per cent behind on their retirement savings. This different in gender was mainly due to the fact that women have high life expectancy and hence need more retirement savings to cover the additional years.

With these estimates, Aon is creating awareness among its client companies to step up and help employees become more prepared for retirement. But the study also highlights other noteworthy takeaways including the fact that company-provided ‘benefit value’ or pension plan accruals are not enough to boost 401(k) retirement contributions.

The survey data in the report shows that over the past 10 years, employer contributions to 401(k) retirement funds has gone down from 7.3 per cent to 6.3 per cent of the employee’s salary – and that is just for those companies that give their workers retirement benefits.

What Can Be Done

The purpose of the report is to show that most American workers aren’t saving enough for a comfortable retirement, and the way employers can help the situation is by not boosting the contributions (especially since most companies don’t even have workers retirement benefits to begin with), but by actually giving their employees incentives to make higher contributions with their own money. According to Aon, this can be done by education the working class on the benefits of retirement savings, offering financial wellness programs and cutting costs on investment funds.

Aon also emphasises on the importance of auto-escalation or auto-enrollment retirement programs can help employees save more and get a full match for their contributions, without the employers having to stash extra money into the workers’ accounts.

There’s also another major takeaway from Aon’s study: the researchers assume an average retirement age of 67 for all employees which is the age when retirees are eligible for full social security benefits. 67 years is well above the traditional retirement age which shows that employers are becoming more accepting of their workers staying with the company past the age of 65. This could also show that the increase in healthcare has boosted the average American lifespan, enabling employees to stay in the workforce for as long as 70 years of age.