Despite the availability of retirement plans and the rally in financial markets, assets in 401(k) and IRA plans declined for many households between 2013 and 2016, according to a new report from the Center for Retirement Research (CRR) at Boston College, using data from the Federal Reserve’s Survey of Consumer Finances.
During that time frame, the median value of combined 401(k) and IRA assets fell almost 17% to $40,000 for households headed by someone age 35 to 44 and declined 3% to $97,000 where the head of household was between 45 and 54.
Households led by someone between 55 and 64, approaching retirement, were the exception. The median value of their combined 401(k) and IRA assets rose 24% to $135,000 during the same time frame, but even those savings are nowhere near enough.
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According to the CRR, the median working couple hoping to retire at 65 with an income that replaces 75% of their pre-retirement income need to have amassed assets equal to 8.5 times their income at age 60, but the $135,000 median they’ve saved is equivalent to just 2.5 times. It translates into a joint-and-survivor annuity of just $600 per month, which is not indexed for inflation and will lose purchasing power over time.
The CRR report cites several reasons for inadequate retirement savings: less than full participation, low contribution levels, high fees and leakages, which occur when participants borrow or cash out of accounts before retirement.
It recommends lower fees, a clampdown on leakages, auto-enrollment for existing and employees with a default contribution rate “set at realistic levels” and auto-escalation of contributions to improve outcomes.
The typical default contribution rate for 401(k) plans that have auto-enrollment — and less than 50% do — is 3%. Without auto-escalation — and less than 40% of plans with auto-enrollment use auto-escalation — those contributions often remain at 3%, according to CRR.
Although retirement savings fell or rose only slightly for many households between 2013 and 2016, they surged for wealthy households whose head was 55 to 64 years old. The median combined 401(k)/IRA assets more than doubled for families in the second-highest income quintile to $335,400 and rose almost 75% to $780,000 for those in the highest quintile, according to CRR.
The participation rate of households in 401(k) plans rose for the highest and lowest quintiles of income but declined slightly for other income quintiles.
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