13. July 2015 13:06
by WHCOA Staff
Written by J. Mark Iwry of the Department of the Treasury
The 2015 White House Conference on Aging underscores the importance of retirement security and saving. To help American families achieve greater retirement security, the U.S. Treasury Department continues working to strengthen and improve our private pension system.
Employees – especially lower-income workers and minorities -- are significantly more likely to save in 401(k)s when enrolled automatically (as first permitted by Treasury in 1998) with the choice to opt out. To encourage 401(k) and similar plans to adopt automatic enrollment, automatic escalation of contributions, and other best practices making saving easier, Treasury regulations and other guidance:
In addition, as our private pension system continues to shift from defined benefit plans designed to provide pensions -- lifetime retirement income -- to 401(k)s, hybrids, and IRAs, which more often pay lump sums, Treasury is working to help retirees manage their savings and protect against the risk of outliving their assets. To promote lifetime income options, Treasury guidance --
And for new savers without access to employer-sponsored retirement plans, Treasury has developed myRA (my Retirement Account). This simple, safe, no-fee, starter retirement savings account, consists of a new Treasury retirement savings bond held in a Roth IRA. Individuals can currently contribute to myRA through payroll deductions at their employers and later this year will be able to contribute directly through their bank accounts. Since myRA is a starter account, savers can transfer any time to a private-sector IRA.
Treasury is also making available to Americans the knowledge and tools to manage money and credit responsibly to better attain their financial goals and contribute to our economy.Through MyMoney.gov
, we provide a trusted source for free, reliable and unbiased financial information, including ways to save.
Annual savings required for retirement:
In the simulations we assume an individual begins working at age 25. His initial wages are set equal to approximately $39,700. To calculate this figure, we start with the average of median usual weekly earnings for 2014 (approximately $790) reported by BLS. We assume the worker works 50 weeks a year, resulting in median yearly earnings of approximately $39,560. We increase this amount by the average yearly real wage growth of median wages from 1984 to 2014 (0.4%). For each year after age 25, real wages grow at 0.4% per year.
We assume the individual will begin receiving Social Security benefits at age 67 (the Full Retirement Age). We assume that the individual will receive 41 percent of his final year’s earnings (approximately $46,200) from Social Security. This replacement rate of Social Security comes from Social Security’s Office of the Chief Actuary’s medium worker scenario in Actuarial Note #2014.9 Table C.
The individual, therefore, must account for the difference between the desired replacement rate and the Social Security replacement rate. For example, if the individual wanted to receive 80 percent of his final year’s earnings, the individual would have to save enough on his own to replace 39 percent (80 percent minus 41 percent).
We assume the individual receives a real rate of return on savings pre-retirement equal to 4%.
Finally, we assume the individual purchases an annuity at retirement that produces steady inflation-adjusted consumption. The cost of the inflation-indexed annuity purchased at retirement is determined under two sets of assumptions. The first one is non-market, assuming a four percent nominal return on investments, a two percent inflation rate, no loading costs, and mortality rates determined by the 2010 United States Life Table. The second one is based on the TSP Retirement Calculator, using an annuity purchased in July 2015 for a 67 year old, and thus is more indicative of the market price for annuities.
The Importance of Starting to Save Early
Retirement saving rate required for a typical worker to achieve retirement income goal
Notes: The individual is assumed to work from ages 25 to 67, wages starting at $39,700 at age 25 in 2015 and grow at a real rate of 0.4 percent per year. Savings prior to retirement earn a 4 percent real rate of return per year. Replacement rate gap would be narrowed to the extent of any defined benefit pension in addition to Social Security. “Savings” are any combination of an individual’s contributions to a retirement savings plan, such as a 401(k) or IRA, and any employer contributions to such a plan.