A new report suggests that many workers may need to significantly reduce their standard of living during retirement if they retire at age 67.
Aon’s “The Real Deal” study finds that only one out of three workers who participate in their employer’s benefit plans over a full career are expected to be able to retire with reasonably adequate retirement income. The study provides insight into the overall retirement readiness of U.S. workers with access to retirement plans, based on data across nearly 30 industries.
The firm cautions that broad averages don’t tell the full story, adding that retirement readiness is ultimately about each individual’s goals and resources. And while every employee’s needs are different, the average employee should save about 11 times their final pay for adequate retirement at age 67, Aon suggests.
On average, contributing employees are saving about 8% of pay. To accumulate 11 times their pay by age 67, employees on average should have 16% of pay going into their retirement accounts every year. If current employee savings trends continue, however, half of workers will need to wait for retirement until at least age 70 to be considered financially prepared, the firm notes.
Overall, the report shows that:
- 19% of full-career contributors are projected to accumulate more assets than needed;
- 15% will be within two times pay to their target needs to allow them a reasonably adequate retirement income if they adjust their postretirement spending or supplement their savings with assets outside of their employer’s plans; and
- 66% of full-career contributing employees are not expected to have saved enough to retire at age 67, being further than two times pay away from their target retirement needs and even with adjustments in spending, these employees will likely need to increase their savings or delay retirement.
Employer Nudges
While the employee’s savings rate is the greatest factor in preparedness, the report emphasizes that employers can help employees by addressing a combination of factors, including investment experience, longevity and retirement age. “The targets employers set for matching contributions and automatic escalation profoundly affect how much workers will save in retirement plans,” the report explains.
For example, many contributing employees only save enough of their pay in employer-sponsored retirement plans to receive all available matching contributions. The authors note that the proportion of annual pay that people tend to save is 4% to 7%, which often is the amount required to receive a full employer match. To that end, the report suggests that employers consider setting higher savings targets for matching contributions.
Moreover, the findings show that 17% more employees would save close to or beyond what they need in retirement if they were automatically escalated to 10%. But even with that escalation, half of workers would still be behind their retirement targets, the report notes.
Aon further suggests that employees need help gaining a realistic sense of how much they need to save to achieve retirement goals. For example, it explains that on average, if workers immediately increased their savings rate by 5 percentage points, they would be close to an adequate retirement at age 67.
“Providing information about how much one should save to reach their retirement goal can be a concrete way to set up employees for financial success in retirement,” notes Aon partner Rob Reiskytl. “It is also important to remember the broader financial wellbeing picture and that there may be legitimate reasons why employees at certain ages aren’t saving ‘enough.’”
The report further emphasizes that it’s critical for employers to make investing as easy as possible for employees. Providing financial help such as online guidance, as well as managed account or premixed portfolios, such as target date funds and target risk funds, is shown to improve participant outcomes, it suggests.
