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Tell young workers: You can fund retirement

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in Employee Benefits Program,Human Resources

Here’s good news to pass along to younger workers in your organization: It is possible to fund a comfortable retirement—if you start contributing to your 401(k) now and commit to doing so throughout your career.

According to a new income simulation analysis by the nonpartisan Employee Benefit Research Institute (EBRI), 30 years of participation in a 401(k) plan—plus current levels of Social Security benefits—should be adequate to produce an annual income of at least 60% of pre-retirement earnings.

EBRI found that between 83% and 86% of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan will accumulate large enough 401(k) balances and Social Security benefits to replace at least 60% of their age-64 wages on an inflation-adjusted basis.

That’s assuming that Social Security benefits continue to pay out at current levels.

The numbers for voluntary-enrollment plans hold up when the replacement-income target goes up to 70%. Between 73% and 76% of employees will be able to hit that mark with 30 years’ worth of 401(k) participation, plus Social Security benefits.

At an 80% replacement rate, 67% of employees will still meet the threshold, EBRI found.

Auto-enroll plans even better

Automatic-enrollment 401(k) plans—in which new employees are automatically signed up to participate—do even better.

When such plans have an annual 1% automatic escalation provision, the probability of successfully building a retirement nest egg increases substantially:

  • 88%–94% at a 60% replacement-income threshold
  • 81%–90% at a 70% threshold
  • 73%–85% at an 80% threshold.  

Read the full report—“The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis”—in the January issue of “EBRI Notes.”

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