Save more now, retire later, or else spend less in retirement
American workers who want to retire someday are going to have to start making difficult choices that involve more pain now and perhaps more years in the workforce, says a new study by Hewitt Associates, a large employee benefits consulting firm.
Higher medical expenses, increasing longevity, and reduced access to pension plans and medical benefits for retirees are making it harder to retire successfully, Hewitt said.
It looked at projected retirement incomes for 2 million employees at 72 U.S. companies, and took into account inflation and medical costs in retirement.
More needed, not less
Traditional retirement planning wisdom has maintained that the average retiree only needs to replace 80 percent to 90 percent of his pre-retirement income.
But Hewitt’s study found that the average worker needs to replace 126 percent of final average pay.
That means a retiree would have to earn more income in retirement than he did while working.
“Without changes in behavior, most workers will either need to significantly reduce their spending or work longer in order to have enough to last through retirement,” said Alison Borland of Hewitt.
Up the savings
The study found that those who don’t contribute to their 401k plans will be able to replace just 40 percent of their incomes in retirement, while those who contribute 8 percent of pay will be able to replace 80 percent of their incomes.
Most workers will probably have to save even more now, retire later, or do a combination of both.
Contributing 15 percent of pay to a 401k for 40 years will leave a retiree with nearly double the amount of assets and retirement income than if she had contributed only 8 percent of pay.
Working a few years longer can also dramatically increase retirement success.
Social Security benefits increase 8% a year for each year you delay collecting them past normal retirement age until age 70. Working longer also reduces the number of years you will have to support yourself in retirement, and it will allow you to accumulate more retirement funds both through contributions and market growth.