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Retirement Savings: How Much Will Workers Have When They Retire?

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Over the past 25 years, an important change has occurred in the structure of employer-sponsored retirement plans in the private sector. Although the percentage of the workforce who participate in employer-sponsored retirement plans has remained relatively stable at approximately half of all workers, the type of plan by which most workers are covered has changed from defined benefit (DB) pensions to defined contribution (DC) plans. The responsibilities of managing a DB plan -- making contributions, investing the assets, and paying the benefits to retired workers and their survivors -- lie mainly with the employer. In a typical DC plan, the worker must decide whether to participate in the plan, how much to contribute, how to invest the contributions, and what to do with the money in the plan when he or she changes jobs or retires. As a result of the shift from DB plans to DC plans, workers today bear more responsibility for preparing for their financial security in retirement.

According to data collected by the Federal Reserve Board, 45% of households in which the householder or spouse was employed contributed to employer-sponsored retirement plans in 2004, and 58% owned a retirement account of any kind. Among married-couple households in which the householder was under age 35, the median balance in all retirement accounts owned by the household was $19,000 in 2004. Among unmarried householders, the median retirement account balance in 2004 was just $7,000. Among married-couple households headed by individuals between 45 and 54 years old, median retirement assets in 2004 were $103,200. Unmarried householders aged 45 to 54 had a median balance of $32,000. Most households that participated in defined contribution plans in 2004 contributed between 3% and 10% of pay to the plan. Younger households with median earnings contributed about 5% of pay, while median-earnings households 45 and older contributed about 6% of pay.

The report also presents the results of an analysis of the amount of retirement savings that households might be able to accumulate by age 65 under a number of different scenarios. The analysis shows how varying the age at which households begin to save for retirement, the percentage of their earnings that they save, and the rate of return on investment can affect the amount of retirement savings the household will accumulate. Using Monte Carlo methods that simulate the variability of investment rates of return, we found that a married-couple household that contributed 8% of pay annually for 30 years beginning at age 35 to a retirement plan invested in a mix of stocks and bonds could expect have accumulated $468,000 (in 2004 dollars) by age 65 if rates of return were at the median over the 30-year period. Nevertheless, given the variability of rates of return, there is a 5% chance that the couple would have $961,000 or more and a 5% chance that the couple would have $214,000 or less. Higher contribution rates and longer investment periods lead to higher account balances, but also increase the impact of the variability of investment rates of return. At a 10% contribution rate over 30 years, the household could expect to accumulate $594,000, with a 90% probability that account would total between $301,000 and $1.2 million. Saving 8% of pay over 40 years, the household could expect to accumulate $844,000, with a 90% probability that the account would total between $370,000 and $2 million. This report will not be updated.


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