Investment returns, not savings, critical to retirement income

A long-term, diversified investment approach is the best way to maximize the chance of successfully meeting retirement income goals, according to new research by Russell Investments.

Investment returns generated by 401(k) savings during an individual's retirement play the critical role in providing retirement income. According to Russell research, this contradicts conventional belief that retirement income is derived predominantly from savings and returns accumulated during a participant's working years.

Russell's latest report builds from research in a 1989 report, ""A Model of Pension Fund Growth" in which Don Ezra, director, Investment Strategy, modeled a DB plan growth and found that "for any one plan member, the largest part of the investment return...accrues during the payout stage." This approach was later dubbed the 10/30/60 Rule by authors Matt Smith, managing director, Retirement Services and Bob Collie, director, Investment Strategy.

Their findings show that in a defined contribution context, the plan benefits that a participant receives in retirement are broken down as follows:

  • 10 percent of each retirement income dollar consists of contributions made to the DC plan while working
  • 30 percent is made up of investment returns generated prior to retirement
  • 60 percent is made up of investment returns generated after retirement

"The current turmoil in the markets can cause individual investors to panic and focus only on the short-term. This research underpins the importance of a long-term, diversified investment approach as the best way to maximize the chance of successfully meeting retirement income goals," Smith said in a press release. "Plan sponsors can do their part by diligently reviewing their plan design to ensure best practices when it comes to investment line-ups, including the plan's default options."

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