NU Online News Service, Sept. 16, 2004, 2:25 p.m. EDT
As the old defined benefit retirement plans give way to defined contribution plans, it has become increasingly difficult for workers to figure out how much income they will need in retirement, according to a new study from the Employee Benefits Research Institute in Washington.[@@]
Defined contribution retirement plans assign greater responsibility to workers in deciding how much money they will need coming in during retirement. And workers simply don’t know whether a given income will provide a comfortable level of support, says EBRI.
A growing percentage of retirees are receiving their benefits as a single lump-sum payment when they go off the payroll, rather than the lifetime monthly annuity payments that were once more common. This means workers must calculate how much regular income a given lump sum would generate.
Assuming a 5% annual inflation rate, for instance, a man earning $50,000 annually would require a lump-sum payment of more than four times his annual pay. The multiple tends to decline for those with lower earnings, because Social Security payments replace a higher percentage of their earnings at work.
“This analysis confirms the increasingly complex task faced by workers in planning for retirement,” says EBRI president and chief executive Dallas Salisbury, “and there are few decisions in life that are more important.”