Continual 401(k) Participation Pays Larger Dividends

November 12, 2002 ( - Younger workers contributing to a 401(k) can expect median initial annual retirement benefits 83% to 85% of their working income, according to a report issued by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

Scenarios were given to project total retirement savings for workers in their late 20s in 2000, who contribute continuously to their 401(k) plans until expected retirement (between 2035 and 2039).  The study found that the “replacement rate” of preretirement income — which also includes expected Social Security benefits under the current system — could exceed 100% of preretirement income for those with low earnings.

EBRI based their simulation using market data from 1926-2001.   During the worst 50 year period of the S&P 500 (1929-1978), the median replacement rate falls to 72% of the highest paid quarter of 401(k) participants, and falls to 92% for the lowest paid quarter.

Situations where a 401(k) was not offered or participation was lax, preretirement replacement rates drop to 42% for the highest quarter of 401(k) participants and 75% for the lowest.

Some financial experts estimate retirees require 70% to 80% of their preretirement income to maintain their preretirement lifestyles, according to the report.

A simulated three year bear market towards the end of the career shows the most devastating effect, reducing median replacement income 13.4% to 17.7%. Even though older workers tend to have a more diversified portfolio away from equities.

Conversely, the same simulation earlier in their careers would only reduce median replacement rates 2.9% to 3.7%.

A simulated three year bull market projects a larger positive effect on median replacement rates the closer a participant is to retirement.  

Dallas Salisbury, President and CEO of EBRI said, “the analysis strongly suggests that staying the course with contributions will help participants live through market swings”.

The results can be found in the November EBRI brief “Can 401(k) Accumulations Generate Significant Income For Future Retirees?” available on EBRI’s Web site .