Employees Making Progress Toward Retirement Readiness

Stronger market returns and continued retirement savings behaviors by employees over the past few years have helped, according to two research reports by Aon Hewitt.  

When inflation and postretirement medical costs are factored in, Aon Hewitt projects employees will need 11 times their final pay in retirement resources, such as company-provided plans and personal savings, to meet their needs in retirement beyond Social Security. Aon Hewitt’s analysis, The Real Deal: 2012 Retirement Income Adequacy at Large Companies, which examined the projected retirement levels of more than 2.2 million employees at 78 large U.S. companies, reveals that, on average, full-career contributing employees are on track to accumulate 8.8 times their final pay, leaving a shortfall of 2.2 times pay. This is a slight improvement over 2010 when the shortfall was 2.4 times pay. Employees who rely solely on a defined contribution (DC) plan to fund their retirement are making similar progress, reducing their shortfall from 4.3 times pay in 2010 to 3.8 times pay.   

According to Aon Hewitt, two main factors contributed to closing the gap: continued savings by employees and strong return on assets. Aon Hewitt’s 2012 Universe Benchmarks report, which analyzes the saving and investing habits of more than 3.6 million U.S. employees, shows 76% participated in a DC plan during 2011. While flat recently, this rate remains at a record-high. Participation among younger workers increased by two percentage points since 2009 to 54% of eligible workers. In addition, the median annualized participant rate of return from 2009 through 2011 was 12%.  

Among factors influencing retirement income adequacy, Aon Hewitt’s research revealed employee savings rates have the largest impact. For example, if not covered by a pension plan, an employee who begins saving at age 25 and targets 11 times pay at retirement needs a combined employer and employee contribution rate of 12% to 18% of pay each year (15% on average) to build up adequate retirement income by age 65. This combined contribution rate increases if the employee does not start saving until later in life.   

The analysis shows the number of full-career contributors who can retire with sufficient retirement assets increases from 29% to 46% if they increase retirement contributions by as little as 1% each year for five years. In addition, a 1% difference in average returns over a career and retirement period can result in a two-times-pay difference in retirement resources.