The retirement readiness of the nation’s workers who are saving money in 401(k) plans remains “stubbornly low” because they are also accumulating too much debt, resulting in a nation of “debt savers,” says a newly released report.
Despite the fact that the average 401(k) and other defined contribution plan participant now defers more than 8% of their annual income toward retirement savings through their plan and social security taxes, these individuals only have about two years of replacement income saved, says a study by Hello Wallet titled “Debt Savers in Defined Contribution Plans.”
The study found that more than 60% of households that have a DC plan added more debt to their family balance sheet than they contributed to retirement savings between 2010 and 2011.
These debt savers have also accumulated other types of debt in recent years. The study found that 20% of DC participants accumulated credit card debt faster than retirement savings; 20% accumulated mortgage debt faster than retirement savings; and the balance accumulated installment (e.g., auto loan), other revolving debt (e.g. home equity), or a combination of debt faster than retirement savings.
The study also found that the monthly debt obligation of active DC households near retirement (those 50 to 65 years old) increased by 69% between 1992 and 2010, now adding up to about 22 cents of every dollar earned.
Most DC participants that accumulate credit card, auto loan, home equity, mortgage, or other forms of debt faster than retirement savings are over 40, college educated, earn more than $50,000 and have insufficient emergency savings, the study states.
The study also found that 41% of debt savers are over the age of 50, and 47% are in the highest income quartile. “However, no demographic variable is strongly associated with the probability that a DC plan participant will accumulate debt faster than retirement savings,” the study says.
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