Projected Retirement Income: What’s the Future Hold for...
Transcript of Projected Retirement Income: What’s the Future Hold for...
Projected Retirement Income: What’s the Future Hold for Employees
Findings from Retirement Income Adequacy at Large Companies, an Aon Hewitt Study
Retirement Income Industry AssociationMay 16, 2013
Today’s Speakers
Rob Reiskytl, FSA Partner, National Leader of Retirement Plan Strategy and DesignAon Hewitt
Barbara Hogg, FSAPartner, Retirement Communication LeaderAon Hewitt
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Why Talk About Retirement Income Adequacy?
Employers want to: Maximize value
of plansEnhance employee
appreciationHelp attract, retain, and
engage employeesFacilitate orderly
retirement patterns
It naturally matters to individuals……but it also matters to employers
Employers seek: Efficiency Adequacy
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Aon Hewitt’s Study: The Real Deal
About the study: Projected retirement income – Resources– Needs
2.2 million employees78 companiesFocus on “full-career contributors”– Hired by age 35– Allows for measurement across
potentially full career
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Study: 2012 Retirement Income Adequacyat Large Companies
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Defining Retirement Income Adequacy
Retirement Resources Consider key sources of retirement income:
Defined Contribution– Actual balances,
contribution elections, and current plan provisions
Defined BenefitSocial Security
Retirement NeedsCalculate amount needed tosustain preretirement standard ofliving
Start with pay at retirementAdjust for: – Retirement savings stop– Taxes decrease– Expenditures change– Medical costs increase
Reflect postretirement inflation and medical trend
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41.8% 36.4% 34.0% 32.1% 29.3% 27.0% 25.3% 23.9% 20.1%13.3%
56.2%55.4%
53.3% 51.2% 51.8% 53.0% 54.3% 55.4% 60.3% 70.9%
98.0%91.8%
87.3%83.3% 81.1% 80.0% 79.6% 79.3% 80.4%
84.2%
Under $30,000
$30,000–$39,999
$40,000–$49,999
$50,000–$59,999
$60,000–$69,999
$70,000–$79,999
$80,000–$89,999
$90,000–$99,999
$100,000–$149,999
$150,000 or Greater
Compensation at Retirement
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Replacement Ratio Targets
Replacement Ratio Needed in First Year of Retirement for a Full-Career Contributor
Private Needs (Average = 56.3%)
Social Security (Average = 28.8%)
Total Needs (Average = 85.1%)
Aon Hewitt The Real Deal—2012 Retirement Income Adequacy at Large Companies
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2.1
2.6
4.1
2.2
11.0
4.9
15.9
8.8
Private Resources
Shortfall Private Needs
Social Security
Total Needs
Full-Career Contributors
Projected Results at Age 65
2.2 times pay shortfall, down from 2.4 times pay in 2010– Strong market returns during
2009 and 2010– Continued participant
contributions– More participants in automatic
contribution escalation
Defined Contribution Plan—Employee Portion
Defined Contribution Plan—Employer Portion
Defined Benefit Plan
Shortfall
Private Needs
Social Security
Total Needs
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Percent of Pay(to retirement)
Multiples of Pay (through
retirement)
85% Total Income Need 15.9 times pay
(29%) Expected from Social Security (4.9 times pay)
56% Other (employer/personal/etc.) 11.0 times pay
How much money do I need to support all my years of retirement?
How much retirement income
do I need when I retire?
Aon Hewitt The Real Deal—2012 Retirement Income Adequacy at Large Companies
Perspectives on Retirement Income Needs
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9.0%
11.8%
16.4%
18.0%
15.7%
11.8%
17.3%
Less than (8)
(8) - (6.1)
(6) - (4.1)
(4) - (2.1)
(2) - (0.1)
0 - 1.9
2 or Greater
Baseline Average = (2.2)
Surplus/(Shortfall) at Age 65
On Track
Relatively even distribution among full-career contributing employees
Nearly 30% are “on track”Another 16% have a relatively small predicted shortfallMore than 20% have projected shortfalls of greater than six times pay
Aon Hewitt The Real Deal—2012 Retirement Income Adequacy at Large Companies
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Tracking Toward Adequate Retirement Income
Total contribution rate (assuming only eligible for a defined contribution plan) required based on age savings start– All contributions (employee and employer) – Percent of each year’s pay
Average percentage shown; approx 3% range around average allows for changing assumptions. Calculations assume consistent savings rate every year during working career until retirement at age 65 (or 67) with targeted retirement resources of 11 times pay at 65 or 9.4 times pay at 67, 7% annual return on DC assets during accumulation, 4% annual pay increases, and unsubsidized future retiree medical coverage
Start at 25 Start at 30 Start at 35
24% (age 65)18% (age 67)15% (age 65)
12% (age 67)
19% (age 65)15% (age 67)
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How can individuals quickly see if they are on track based on how much they have accumulated?
0.00x1.75x
4.00x
7.00x
11.00x
25 35 45 55 65
Aon Hewitt The Real Deal—2012 Retirement Income Adequacy at Large Companies
Tracking Toward Adequate Retirement Income
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Multiples of Pay Milestones
Age
11
Results for DC-Only Employers
3.4
2.3
3.2
3.9
4.4
1.1 3.89.6
7.6
10.7 11.4
Private Resources
Shortfall Private Needs
Private Resources
Shortfall Private Needs
DB & DC Employees DC Only Employees
DC-only employees are projected to have a larger shortfall, on
average, due to lower total
employer-provided benefits
Average:Employees With DB
and DC PlansEmployees With DC
Plans Only
Participation rate 78% 69%
Savings rate 7.8% 6.7%
Age 65 projected savings rate 8.8% 9.4%
Account balance to date $120,000 $67,000
Age 41 35
Service 15 9
Pay $83,000 $68,000
Defined Contribution Plan—Employee Portion
Defined Contribution Plan—Employer Portion
Defined Benefit Plan
Shortfall
Private Needs
Social Security
Total Needs
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Impact of Gender
2.6 1.98.6 8.9
11.2 10.8
Private Resources
Shortfall Private Needs
Private Resources
Shortfall Private Needs
Females Males
Average: Females Males
Participation rate 73% 74%
Savings rate 6.9% 7.8%
Account balance to date $75,000 $118,000
Life expectancy age 88 87
Age 39 39
Service 13 13
Pay $66,000 $87,000
Females are more at risk of inadequate retirement
income because they save less than males and
are expected to live longer
Private Resources
Shortfall
Private Needs
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How Can We Improve Results?
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Employer actionsExpand automation
Offer array of investment advisory
servicesDesign plans thoughtfully
Employee actionsRetire laterSave more
Invest better Understand and
use lifetime income solutions
GamificationModeling Tools
Driving Behaviors and Outcomes
Are you on track to retire?
• How old are you? • How much do you earn?
Personalized Communication Benefits Hubs Flash/Video
Attitudinal Segmentation
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Taking Action
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Identify andManage Risk• Adequacy
modeling• Workforce
analysis
Communicatewith Employees• Education /
awareness• Personalized
communication • Online modeling
tools • Professional help
Consider LongevitySolutions• Education on
alternatives • Cost/benefit
analysis • Choosing
providers
1 2 3
Large Consumer Products CompanyProblem: Organization seeks to embrace DC Plan Sponsorship, differences from DBAnalysis: Measure theoretical potential, followed by Real Deal study of actual results
1. Measure theoretical retirement income potential of new DC plans versus prior DB plans
2. Analyze actual Real Deal resultsNew hires DC-OnlyGrandfathered with pensionChoice with partial pension
3. FindingsFemales tend to have smaller balances and live longer, but they also save at stronger rates than malesKeep automation, with increased escalation defaultsConsider financial advice and lifetime income solutionsClarify messages and communicate
4. Next steps—consider: Race/ethnicitySensitivity to future inflationImpact of changing health careImpact of changing tax rates
Retiree Medical Subsidy
DC Plan—Employee Portion
DC Plan—Employer Portion
Defined Benefit Plan
Social Security
Shortfall
Retirement Needs
All results expressed as multiples of payAll results expressed as multiples of pay
4.4
2.11.2
2.73.7
2.4 1.0
3.8 4.7
4.7
0.113.3
14.115.115.7
Resources Shortfall Needs Resources Shortfall Needs
Real Deal Study Land O'LakesABC CompanyReal Deal Study Including Key Scenarios
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
65 70 75 80 85 90 95 100
DB Benefit Social Security Total DC Balance Total Need
Retirement Adequacy Modeling
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Technology CompanyProblem: Client needs to improve awareness of retirement income targets and promote actionSolutions: Use personalized employee education and online modeling tools
1. Educate through personalized communication and messaging
2. Offer Retirement Readiness Calculator
3. Promote financial education and planning resources (telephone-based personal financial planning)
Retirement Readiness Modeler
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