Post-Retirement Returns Critical to Retirement Income

A good portion of participants’ retirement income will come from investment returns generated by 401(k) accounts after they stop work, research from Russell Investments says.

Authors Matt Smith, Managing Director of Retirement Services and Bob Collie, Director of Investment Strategy analyzed the make-up of retirement income of participants in a defined contribution (DC) context.

The researchers dubbed their work the 10/30/60 rule, because each dollar of retirement income will be made up of the following:

  • 10% contributions made to the DC plan while working;
  • 30% investment returns generated before retirement;
  • 60% of investment returns generated after retirement.

Russell altered several input assumptions—such as the retirement age, the age when saving begins, and age of death—and found that only lowering the expected post-retirement return would significantly change the 10/30/60 rule.

Smith points out that the research should not undervalue the contribution level; without contributions, there can be no return. “With roughly 90% of distributions being generated by investment earnings, sound investment programs are critical if DC plans are to be effective in meeting goals for financial security in retirement,’ Smith said in the release. “This research underpins the importance of a long-term, diversified investment approach as the best way to maximize the chance of successfully meeting retirement income goals.”