Gail MarksJarvis: Retirement prospects only bright for diligent savers

McClatchy-Tribune Information Services

September 14, 2015

If you think you are going to retire at 65, think again.

Itís likely that you arenít going to have enough money stashed away to make retirement work out for you. Only two in five people working for large U.S. companies will be ready financially to retire at age 65, according to a study by human resources firm Aon Hewitt.

The others will have to work longer if they want to maintain the lifestyle theyíve been used to during their working years. About half of people will be able to retire with sufficient savings if they keep working until age 68. But even working longer will fail many. Aon found that about 16 percent wonít have enough if they work to 75.

These are disturbing findings, because the study focuses on large U.S. companies, where employees typically fare the best at getting ready for retirement. Large companies tend to be among the few still providing guaranteed pensions. They also tend to offer quality 401(k)s, and give some guidance to employees baffled by building up retirement savings. In general, small employers tend to skip 401(k)s so workers must fend for themselves and they do a poor job of accumulating savings.

Only about half of U.S. workers are employed where 401(k)s are offered. Without workplace plans, most individuals donít turn to individual retirement plans (IRAs).

So if only two in five people at large companies will have enough money to retire, thatís a dreary finding that points to a brewing retirement crisis for the U.S. That crisis clearly will be harsh on people who havenít saved enough, but it could also carry a price tag for people who have been diligent about saving if the government ends up taxing people more to aid a struggling aging population.

Aon Hewitt figures that to retire with enough resources, people should have, on average, 11 times their last annual salary accumulated to cover retirement living expenses. If, for example, a person was earning $75,000 a year when they retired, they would need about $825,000 for retirement. If the person was lucky enough to have a guaranteed pension that would pay $30,000 a year, the total value at retirement would be about $420,000, said Aon Hewitt Associate Partner Grace Lattyak. She multiplied the annual $30,000 payment by 14 to figure the full value of the pension.

To get to the $825,000 needed for retirement, the individual would need to have an additional $405,000 in personal savings from a 401(k), IRA or a combination.

People who are many years from retirement will need to have even larger nest eggs when they retire because health care costs are rising faster than pay and people are living longer, said Lattyak. Thirty-year-olds earning $30,000 now are likely to need about 13.4 times their annual salary the year they retire, Lattyak said.

Employers are cutting out health care benefits and old-style guaranteed pensions for employees. But large U.S. company do contribute about 5 percent of a workerís pay toward his or her 401(k) plan. To make sure savings are adequate by retirement, Lattyak said the employee should be saving 12 percent of pay each year to the 401(k), in addition to the contribution their employer provides.

If the person is 35 and hasnít saved anything, and has no pension coming, that individual should start saving 20 percent of pay. At 45, if the person hasnít been saving earlier, Lattyak said about 35 percent of pay should be stashed away.

Companies that nudge their employees to save, rather than waiting for the employee to take the initiative to get going, help their staffs end up with better results. Using whatís known as "automatic enrollment", companies immediately enroll employees in the 401(k) when they are hired and deposit some of every paycheck in the retirement savings plan for each employee.

Aon Hewitt found that companies using automatic enrollment increased participation in a 401(k) by 20 percent over businesses that waited for individuals to take the initiative. About 84 percent of employees contribute when their employer enrolls them automatically.

Some companies go a step further. They use whatís called "automatic escalation." Each year they increase the percentage of pay slightly that each employee automatically contributes into their 401(k). With this approach, Aon figures 70 percent of people who work for the same company throughout their work life will have nearly adequate savings for retirement at age 65.