NU Online News Service, June 28, 2004, 3:46 p.m. EDT

Some Americans who work for large U.S. companies could end up having to live on just 20% of their preretirement income when they retire.[@@]

When researchers at Hewitt Associates Inc., Lincolnshire, Ill., looked at income projections for 1 million employees at 62 large U.S. companies, they found that workers who contribute to 401(k) plans and get solid retiree health benefits and defined benefit pension benefits could end up replacing an average of 103% of their preretirement income when they retire.

But the researchers note that only 68% of large U.S. employers offer defined benefit pension plans and that many workers refuse to participate in 401(k) plans.

The income replacement ratio might average about 80% for workers who contribute to 401(k) plans but have no defined benefit pension benefits, and the replacement ratio might average just 40% for workers who have no retirement plan benefits of any kind, the Hewitt researchers estimate.

Paying for health coverage could cost about 20% of preretirement income for retirees who have no employer subsidies, the researchers warn.

Some retirees might decide to get by without health coverage.

For retirees who do buy health coverage, the income replacement ratio could fall to 60% for retirees with 401(k) benefits but no pension benefits or employer-sponsored retiree health benefits, and the ratio could fall to 20% for retirees who get no support at all from their former employers.

The Hewitt researchers point out that retiring a few years earlier can lead to a huge increase in total retirement costs. But retiring at age 67 and contributing an additional 2% of income to 401(k) plans can provide a big boost to employees’ ultimate retirement income, the researchers write.