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Social Security plus 401(k): A cozy retirement?

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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 percent of their preretirement pay on an inflation-adjusted basis.

See also: A counterintuitive Social Security strategy can fund an early retirement

In just-released research, EBRI says that assuming current Social Security benefits are not reduced, 83 percent to 86 percent 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 percent 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 percent replacement of income at age 64, 73 percent to 76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent 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 percent automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88 percent to 94 percent at a 60 percent threshold; 81 percent to 90 percent at a 70 percent replacement threshold; and 73 percent to 85 percent at an 80 percent 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 percent 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 percent replacement threshold drops 17 percentage points, from 67 percent to 50 percent, while the highest-income quartile — which receives less proportionate benefits from Social Security — drops by only 9 percentage points, from 59 percent to 50 percent.”

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