Retirement Income Adequacy for Today’s Workers: How Certain, How Much Will it Cost, and How Does Eligibility for Participation in a Defined Contribution Plan Help?

The concept of retirement income adequacy for today’s workers has been gaining increased interest in recent months with the prospects of lower investment yields as well as the limited employment options for Baby Boomers wanting to work past retirement. Earlier this year, EBRI updated its Retirement Security Projection Model® (RSPM) to show how the EBRI Retirement Readiness Ratings™ (measuring the percentage of households that are likely to have sufficient money in retirement to pay for basic expenses plus uninsured health care costs) have changed in the last seven years. The good news is that the portion of Boomers and Gen Xers “at risk” of having inadequate retirement income has actually decreased during that time, even after factoring in the recent decline in the financial markets and housing values. Early Boomers (those born between 1948 and 1954) had an “at risk” rating of 59 percent in 2003; however, by 2010 that number had dropped to 47 percent. The “at risk” ratings for Late Boomers (those born between 1955 and 1964) decreased from 55 to 44 percent, while those for Gen Xers (those born between 1965 and 1974) decreased from 57 to 45 percent. Unfortunately, that still leaves nearly one-half of the households in these age cohorts “at risk” of having inadequate retirement income, and the likelihood that the Early Boomers will run short of money within the first 10 years of retirement is as high as 41 percent for those in the lowest (preretirement) income quartile. This paper builds on EBRI’s Retirement Security Projection Model® (RSPM) to determine how much households need to save each year until retirement to maintain a probability level they will be able to afford simulated retirement expenses for the remainder of the lifetime of the family unit. The objective of this paper is to focus on the importance of future eligibility for a defined contribution plan, whether or not the employee actually chooses to participate. The RSPM model shows that eligibility for a defined contribution (primarily 401(k)) retirement plan has a significant positive impact on reducing the additional compensation most families need to achieve the desired level of retirement income adequacy. This finding has major implications for any policies that would decrease the percentage of workers eligible to participate in defined contribution retirement plans. Furthermore, it is clear from the results presented in the paper that the relative impact of future eligibility in a defined contribution plan will depend on several factors: the workers’ ages; their relative income level; the probability of retirement income adequacy they desire; whether the appropriate target is the median additional percentage of compensation or one large enough that 3 out of 4 workers would have sufficient retirement income. The PDF for the above title, published in the September 2010 issue of EBRI Notes, also contains the fulltext of another September 2010 EBRI Notes article abstracted on SSRN: “2010 Health Confidence Survey: Health Reform Does Not Increase Confidence in the Health Care System.”