In its latest research paper, “What’s the right savings rate?” Russell breaks down various parts of plan design in an effort to improve participant behavior.
Russell built its framework based on two questions:
What is the “right” percentage of a participant’s pre-retirement salary that will be required to meet spending needs in retirement?
What target replacement income – TRI – is sufficient to fund retirement?
To answer the first question, Russell developed the “TRI 30” rule-of-thumb. Participants can determine their appropriate individual savings rates by multiplying their TRI rate by 30%. According to Russell’s research, saving 30% of the TRI rate each year, including any employer contribution, leads to about a 90% probability of meeting the income goal at retirement.
Russell outlines additional considerations for determining an individual’s TRI in its paper, including the volatility of health care expenses and the challenges faced by lower-income participants.
“We’ve designed this framework to help plan sponsors determine what the right savings rate is for their average participant,” said Cohen. “There will never be a single answer for everyone, but what we hope is that this approach can spark a smart conversation focused on setting reasonable savings goals.