Hewitt: Many Not Saving Enough

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July 7, 2008 Monday

INVESTMENT PRODUCTS; Pg. 6 Vol. 173 No. 129

364 words

Hewitt: Many Not Saving Enough

Matt Ackermann

Most individuals are not saving enough for retirement, because they are not compensating for rising medical costs, lengthening life spans, and the declining availability of pension and retiree medical benefits, according to a study released last week by Hewitt Associates Inc.

Workers will need to replace, on average, 126% of their annual salary at retirement, versus the traditional targets of 70% to 90%, the study predicts.

The Lincolnshire, Neb., human resources consulting and outsourcing company's study highlights the gap between the amount people need to maintain their standard of living in retirement and what retirement plans are projected to provide.

Hewitt said employees who contribute to their 401(k) plan and are willing to make small improvements to their saving and investing habits can lessen the gap and increase their future income potential.

The study examined the projected retirement levels of nearly 2 million employees at 72 large U.S. companies in the second quarter.

According to Hewitt, only 19% of employees will be able to meet 100% of their estimated needs in retirement at their current level of savings. The average employee is expected to replace 85% of their income in retirement, the study said.

Employees who contribute an average of 8% of their pay to a 401(k) plan can replace 96% of their pre-retirement income, providing about 80% of what they would need to maintain their standard of living, the study said. That income replacement figure drops to just 54%, or less than 40% of projected needs, for employees who do not contribute to a 401(k) plan.

Even employees who have a pension plan can expect to replace just 62% of their income at retirement if they do not contribute to their 401(k) plan, the study said.

Hewitt's research shows that 26% of employees do not participate in their 401(k) plan, and 61% of those who do participate contribute less than 7% of their annual income.

For employees who contribute to their 401(k) plan, retiring at age 67, rather than 65, and saving 2% more a year can boost their projected income replacement from 85% to 107%, Hewitt said.

More than 90% of large companies offer a 401(k) employer match, the study said.

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July 4, 2008