Rich or poor, workers win if firms prod them to save

Most people in their 20s will have a decent retirement if they keep 401(k) habits

Are you going to be OK in retirement, or will you end up scavenging for food and hoping the lottery will save you from years of saving neglect?

Recent criticism of the 401(k) system suggests the dreary life of a scavenger for millions of Americans who didn't squirrel away what they needed and blew it investing in retirement plans. Yet, a new study suggests that if you are young enough and happen to work for an employer that baby-sits you when it comes to saving for your future, you should end up fine.

The study by the Employee Benefit Research Institute (EBRI) finds that if you have an employer that pushes you to save some of every paycheck in a 401(k), gives you simple mutual fund choices, and if you save some of every paycheck during 30 years of work, you will end up in retirement with what you need to keep your roof over your head and perhaps have a little fun too.

On the other hand, if you don't have a paternalistic employer and are left to your own devices, you aren't as likely to be as secure in the future.

The issue matters to the nation as well as to individuals, because most Americans don't save enough and are putting the country in the position of facing a grandiose retirement crisis. Only about half of working people have a 401(k) or other retirement plans at work. Few without them open individual retirement accounts or save efficiently for retirement.

But EBRI research director Jack VanDerhei found that 86 percent of low-income people with 401(k) plans are doing what they need to do with those accounts to eventually cover a basic bare-bones retirement. In the highest-income group, 83 percent are on course.

The EBRI think tank used a database of 24 million Americans with 401(k) plans and assumed their saving practices will continue for 30 years. Also, those who appear on course will have only enough for basics like food, housing and heat — nothing extra. To provide that kind of retirement, a person puts away enough over a lifetime of savings in a 401(k) to replace 60 percent of what they were earning annually on the job at age 64.

Financial planners say 60 percent is too bare-bones and want clients to prepare to replace at least 70 to 80 percent of their pay by retirement day.

Only 76 percent of the low-income group and 73 percent of the high-income group are on course to make that 70 percent replacement level. And only 67 percent of the low-income group and 59 percent of the highest-paid group are on their way to replacing 80 percent. At 80 percent replacement, people can come close to the lifestyle they were used to while working.

The reason the highest-income people are in worse shape for their future than the lowest-income: the eventual impact of Social Security. Lower-income people get enough Social Security to replace about half their income in retirement, compared with higher-income people, for whom Social Security covers only about a quarter. To estimate your Social Security, try this calculator: ssa.gov/estimator.

VanDerhei said Americans with 401(k) plans are doing better in building savings now than they were years ago because after 2006, many employers began to provide target date funds — an easy way for people to invest money without being overly cautious or overly risky based on their age. People choose a fund with the year they will retire in the name. Then fund managers invest a lot in stocks when people are young, and as the person ages, they reduce risks by investing less in stocks and more in bonds.

Many employers are also pushing employees to save more by channeling a certain percentage of each paycheck immediately into 401(k) retirement accounts. This is done automatically without specifically asking for an employee's permission.

Three percent of pay is common, and some employers increase the amount by 1 percent a year. Along with free matching money from employers, the automatic contributions to a 401(k) can mean employees save around 10 percent of their pay a year — a rule of thumb for people seeking a decent future.

The people who have been pushed by employers through automatic contributions to 401(k) plans are the best positioned for their future. According to the EBRI research, 94 percent of low-income workers and 88 percent of the highest-income quartile with the activist employers will be able to replace 60 percent of their income in retirement. About 85 percent of lower-income people and 73 percent of higher-income earners will be able to replace 80 percent of their pay in retirement.

gmarksjarvis@tribune.com

twitter @gailmarksjarvis

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