Aggressive Saving Is Simply Essential for Retirement Adequacy

A detailed analysis prepared by Aon suggests the typical worker would have to start saving at age 25 and put away 16% of pay annually—including the employer retirement plan match—to achieve a stable retirement outlook by age 67.

Rob Reiskytl, a partner and actuarial retirement consultant at Aon, recently spoke with PLANADVISER about his firm’s new white paper, “The Real Deal,” which is based on the Aon 2018 Retirement Income Adequacy Study.

As Reiskytl points out, the topline findings of the paper are sobering, showing that only about one in three workers will have enough saved to retire comfortably at age 67—i.e., retire without giving up a large portion of their average working-year income. Still, he points to reasons for optimism, including the simple fact that employers have a tremendous amount of influence over the savings behaviors of their workers.

According to Reiskytl and the work of Aon researchers, one basic strategy for assessing and discussing an individual’s retirement readiness in this context is to compare their net savings amount with a simple multiplier of annual pay. The paper suggests the multiple of final annual pay that the average employee will need to have saved for an “adequate retirement at age 67” is just over 11-times. In other words, an employee making $100,000 per year would need to have saved something like $1.1 million by age 67 in order to maintain their standard of living after leaving the workforce.

Even as the typical worker can save for more than four decades in order to prepare for retirement, reaching this multiple requires lifelong discipline. As the paper says, even assuming an individual starts diligently saving at age 25 and never stops, the proportion of annual pay that needs to be deferred by this employee (with the addition of any employer match) is 16% in order to reach the 11-times figure by age 67. Today, before the employer match, most individuals tend to save between 4% and 7% of pay.

Other findings show “only 19%” of full-career contributors are projected to accumulate more wealth than they will need in retirement, while 15% will “fall close enough, or within two-times pay of our recommended target.” According to the Aon white paper, reaching a minimum of nine-times final pay saved will allow retirees to find at least basic financial stability by adjusting their post-retirement income downward.  

“Still, that leaves two out of three full-career contributing employees who are not expected to have saved enough to retire at age 67,” Reiskytl says. “Even with adjustments in spending, these employees will likely need to increase their savings or delay their retirement.”

According to Reiskytl, one of the most direct moves an employer can make to promote better retirement plan outcomes is to either increase or “stretch the match,” such that employees need to contribute a greater percentage of annual pay to the plan to get the full match. Of course, stretching the match has to be done carefully, Reiskytl says, because many employees further down on the pay scale are already stretched thin economically and may not be able to afford to save more to reach the full match amount. In these cases, it can be helpful for the employer to think about instituting some kind of non-elective contribution structure that could help these people.

“Many contributing employees only save enough of their pay in employer-sponsored retirement plans to receive all available matching contributions,” the paper says. “At-the-match savers generally do not accumulate the amount needed for a financially secure retirement.”

In order to really change the savings adequacy picture for the average employee, Reiskytl says, a more fundamental understanding of the amount the average employee is saving is required. It is also crucial for employers to understand how the success of their retirement plan benefits ties directly to their success (or lack thereof) when it comes to long-term workforce management, talent acquisition, overall compensation and benefits spend, etc.

“We also need to make sure individuals understand that saving more is almost always within the realm of possibility,” Reiskytl says. “If every worker boosted their savings rate by 5% tomorrow, the average employee would be close to an adequate retirement at age 67. For each additional 1% of pay saved per year, workers reduce their shortfall projection by 0.5-times pay.”

Some other recommendations for retirement plan sponsors and advisers to consider, detailed in the white paper, include the following: “Target younger workers with communication materials that explain how they should realistically project their expected retirement age and income needs; reduce the costs associated with defined contribution plans that are passed on to employees through careful selection and monitoring of investment options to enable strong performance over a career; and provide generation-specific financial wellbeing education that helps workers budget and save more effectively.”

Also notable, female employees will likely need to save more for retirement than their male counterparts because women have longer lifespans, according to the white paper. Women typically earn less and spend more time out of the work force than men, as well, leaving them with less retirement savings.