Social Security Plus 401(k): A Comfortable Retirement?

Current Social Security benefits and 30 years of 401(k) savings could provide most workers with enough retirement income

It’s one of the most hotly debated questions: will Social Security and retirement savings be enough to sustain workers in retirement?

The Employee Benefit Research Institute says that current levels of Social Security benefits coupled with at least 30 years of 401(k) savings could provide most workers with annual income of at least 60% of their preretirement pay on an inflation-adjusted basis.

In just-released research, EBRI says that assuming current Social Security benefits are not reduced, 83% to 86% of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with Social Security retirement benefits, will be able to replace at least 60% of their wages and salary at age 64 on an inflation-adjusted basis.

When the threshold for a financially successful retirement is increased to 70% replacement of income at age 64, 73% to 76% of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80% replacement rate, 67% of the lowest income quartile will still meet the threshold.

The new analysis by EBRI’s proprietary retirement adequacy computer modeling also found that when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1% automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88% to 94% at a 60% threshold; 81% to 90% at a 70% replacement threshold; and 73% to 85% at an 80% threshold.

Jack VanDerhei, EBRI research director and author of the analysis, notes that Social Security benefits are an integral component of retirement income security, particularly for lower income workers.

“If, for example, we assume that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile — which receives less proportionate benefits from Social Security — drops by only 9 percentage points, from 59% to 50%.”

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Check out How a Counterintuitive Social Security Strategy Can Fund an Early Retirement on ThinkAdvisor.

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