Measuring Retirement Income Adequacy, Part One: Traditional Replacement Ratios and Results for Workers at Large Companies

September 2004, Vol. 25, No. 9
Paperback, 15 pp.
PDF, 743 kb
Employee Benefit Research Institute, 2004

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Executive Summary

This article is the first
of a two-part series intended to sort through some of the issues and variations
in determining whether the post-World War II baby boom generation is likely to
achieve an "acceptable" standard of living in retirement.

The Aon Consulting/Georgia State University study on benchmarking retirement income
needs has provided periodic updates of this type of calculation for various
levels of preretirement income since 1988.

Under their baseline calculation (assuming a family situation where there is one wage earner
who retires at age 65 with a spouse age 62), the replacement ratios peak at 89
percent for those in the lowest income group ($20,000 annually) and then
gradually reduce to 75 percent for those earning $60,000 annually before
increasing back to 88 percent for those in the high-income categories

A recent study by Hewitt Associates shows that the typical 401(k) participant is
well-positioned to replace 85?95 percent of preretirement income when current
Social Security, existing profit-sharing, and defined benefit plans are taken
into account. The study examined the projected preretirement income replacement
levels across 62 large companies of the 960,000 employees who were actively
participating in their 401(k) plans as of Jan. 1, 2003.

The overall average replacement ratio for the Hewitt analysis drops from 95 percent under the high
medical coverage assumption to 83 percent under the medium assumption and 80
percent under the low medical coverage assumption. This is true for employees
retiring at a ?normal? retirement age of 65, and who are relying primarily on
Medicare for their health care benefits. Employees retiring at an earlier age
will experience an even larger financial setback..