Analysis Gives Hope for Pre-Retirees' Savings Recovery

June 22, 2009 ( - Financial Engines says its new analysis on the impact of the market decline in 2008 on investors nearing retirement found that even for investors within five years of retirement, modest increases in savings combined with slightly delayed retirement can recover their pre-2008 retirement outlooks if they stay in a diversified, age-appropriate portfolio.

According to a press release, many 401(k) participants assume that the large portfolio losses experienced in 2008 mean needing to work five or 10 years longer than planned, but Financial Engines’ analysis shows that large portfolio losses do not translate into equally large percentage decreases in projected retirement income.

The reason for this is retirement income that will be generated from future savings or Social Security benefits is not affected by the 2008 decline. Therefore, for near-retirees who began 2008 on track to meet their retirement goals, typical portfolio declines of 23% to 30% resulted in a decrease of only 10% to 19% in their projected median retirement incomes

The analysis does suggest that delaying retirement and increasing savings are two powerful levers for getting participants back on track to meet their retirement goals, but for many near-retirees, delaying retirement by only two to three years can get them back on track without any increase in annual savings.

Delaying retirement is effective because it compounds several factors: allowing more years of savings, giving savings more time to grow, decreasing the number of years of retirement spending that need to be funded, and increasing Social Security benefits.

On the other hand, those 401(k) participants who reacted to declining equity markets by moving all of their balances into money market funds or other fixed income investments have more work to do to get back on track, the announcement said. The analysis found that these investors are likely to have to delay retirement as much as four years above and beyond the other steps needed to recover from the 2008 declines.

Recovery Strategies for a 60-Year Old Earning $75,000 per Year

align="center"> Retirement Age

align="center"> Estimated Savings Increase*

align="center"> New Total Savings Rate (including employer match)

align="center"> 65

align="center"> 36% per year

align="center"> 45% per year

align="center"> 66

align="center"> 14% per year

align="center"> 23% per year

align="center"> 67

align="center"> No Additional Savings Required; More Saving or Later Retirement May Increase Chance of Reaching Retirement Goal

align="center"> 68

align="center"> 69

*Assumes original savings rate of 9% per year (6% of salary with 50% matching contribution on up to 6% of salary). Additional savings above 6% of salary does not increase employer matching contribution.

Impact of All Cash Portfolio on Delayed Retirement

align="center"> Salary

align="center"> Age (as of Jan. 2008)

align="center"> Adjusted Projected Retirement Age with Diversified Portfolio (A)

align="center"> Adjusted Projected Retirement Age with All Cash Portfolio (B)

align="center"> Impact of All Cash Portfolio

align="center"> (B - A)

align="center"> $50,000

align="center"> 50

align="center"> 66.5 yrs

align="center"> 68.2 yrs

align="center"> 1.7 yrs

align="center"> 55

align="center"> 66.7

align="center"> 67.9

align="center"> 1.2

align="center"> 60

align="center"> 66.4

align="center"> 67.0

align="center"> 0.5

align="center"> $75,000

align="center"> 50

align="center"> 67.1

align="center"> 69.7

align="center"> 2.6

align="center"> 55

align="center"> 67.2

align="center"> 69.1

align="center"> 1.9

align="center"> 60

align="center"> 66.9

align="center"> 67.9

align="center"> 1.0

align="center"> $100,000

align="center"> 50

align="center"> 67.5

align="center"> 71.5

align="center"> 4.0

align="center"> 55

align="center"> 67.6

align="center"> 69.9

align="center"> 2.4

align="center"> 60

align="center"> 67.4

align="center"> 68.7

align="center"> 1.4

All examples in this table assume original planned retirement at 65 and maintain total savings rate of 9% per year (6% of salary with 50% matching contribution), and project the retirement age needed to achieve a median retirement income forecast equal to a pre-2008 forecast..