What is the Right Savings Rate for a Company Retirement Plan?
In a recent study sponsored by Russell Investments, the study sited that the optimal savings rate for the average investor should be 10%-11% of compensation. In stark contrast, the average participant’s savings rate in a defined contribution retirement plan is only around 7%.
The Target Replacement Income (TRI) rate was applied to several case studies. The TRI is a specific percentage of one’s final pre-retirement salary. A TRI 30 was used as a rule of thumb where 30% of the TRI each year, including any employer contribution leads to a 90% chance of reaching the TRI. The study concluded that an annual pre-retirement savings rate between 12%-18% will lead to a high probability of being secure for retirement. However, this result is different for every person depending on many factors such as age, salary, and accumulated savings.
The study acknowledges that saving for retirement is not the easiest thing to do for participants due in part to job changes, and participants lowering their savings rate due to life events. Furthermore, the study recognizes that the need to save for retirement is a growing concern because retirement is more expensive than ever coupled with volatility in health care expenses, which can deplete savings quickly.
More about the research study can be found here: http://www.russell.com/Institutional/research_commentary/PDF/Whats_the_right_savings_rate_.pdf
Employees Should Save More to Decrease Concern about Retirement
In a survey by the American Institute of Certified Public Accountants, almost 40% of Americans said they could never afford retirement. 55% of Americans did not even know how much to save for retirement. Fund companies like Vanguard tend to recommend a savings rate between 9% and 12%, but that is too low for some. Maria Bruno, author of the article, stated a savings rate of 12% and 15% is a best practice.
Ms. Bruno, a senior analyst with Vanguard Investment Counseling and Research, believes the employers should be the ones to educate their employees about the importance of saving more and to start saving now. She also believes programs should be put into place such as automatic enrollment and auto increases to get more employees to participate.
The major sticking point is for employees to start saving now for retirement, and to save more in order to adequately save enough for retirement.
More information regarding this survey can be found here: https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvRetIncreasedSavings
Preparedness for Retirement Still Remains Low for U.S. Workers
In a report by Financial Finesse, 57% of Americans between ages 55 and 64, considered the pre-retirement years, have never run a calculation as to how much money they will actually need for retirement. This number increased as the age group decreased in age. Of greatest concern, the report found that people who did not have an emergency fund, did not pay off bills in full each month, and did not have a plan to pay back debt, were the least likely to run a retirement calculation.
Liz Davidson, the CEO and Founder of Financial Finesse, the nation’s leading provider of unbiased financial education programs, said that the report is more disconcerting because of decreased support from employers and the government with respect to retirement savings. The report heralds a resounding theme that every employee needs to save more and have a plan for retirement.
More can be found here: http://www.plansponsor.com/US_Employees_Retirement_Preparedness_Remains_Low.aspx