Reaching Retirement Readiness

Being able to replace working income with income generated from retirement savings is the essential definition of retirement readiness. The percentage of working income that an individual may need in retirement will vary, depending on a number of factors, such as whether or not they will still have a mortgage, the amount of their Social Security benefit, their tax bracket, variable healthcare costs, lifestyle choices and having income from part-time work, among others.

When projecting retirement income needs, a 70%-85% target replacement ratio is commonly cited. Recent research by Vanguard reveals that that goal may be well within reach for many plan participants. The 2022 Vanguard Participant Saving Rate Index suggests that 7 in 10 DC plan participants are currently saving at rates that would enable them to attain a 65% replacement rate in retirement. Furthermore, their data show that just a modest increase in participant elective deferral rates would enable most plan participants to attain a 75% replacement rate.

Assumptions Used

Vanguard’s researchers analyzed approximately 1.9 million eligible employees and 1.5 million actively contributing participants in approximate 880 plans for which the firm serves as recordkeeper. Research modeling assumes that target saving rates are 9% where income is less than $50,000, 12% where income is between $50,000 and $100,000, and 15% where income is more than $100,000 (saving rates include both the employee elective contributions and any employer contributions). It also assumes a 75% target replacement ratio, 4% real return, 1% real wage growth, 40 years of saving (from age 27 to 67), and a 4% withdrawal rate at retirement.

The Impact of Automatic Features

The researchers note that while some participants may not be saving at or above their target rate, many are close. Auto-enrollment coupled with auto-escalation will be instrumental in helping many of the participants get the rest of the way. Currently, 4 in 10 of the participants in the study are automatically enrolled and will see their saving rates rise by 1 - 3 percentage points over the next few years. At this rate, the study’s modeling shows that 70% of participants would reach a 75% replacement rate in retirement.

Additional Observations

Across all eligible participants in plans with automatic enrollment, employees are much more likely to be saving effectively (45% compared with 26% in plans without automatic enrollment). As of year-end 2021, 58% of plans default at a rate of 4% or higher, compared with just 32% ten years ago. An automatic enrollment default of 6% or higher was a strong predictor of participants saving effectively, along with a generous employer match. Plan size did not affect the results of the study.

The 2022 Vanguard Participant Saving Rate Index can be viewed at: https://tinyurl.com/yahvzrwn.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.