A new Hewitt Associates analysis indicates the gap between what employees are saving and what they need to be saving is even greater following the market downturn.
According to a news release, in July 2008, Hewitt predicted that employees needed to replace, on average, 126% of their final pay at retirement, after factoring in inflation and increases in medical costs, and most workers were on track to replace just 85% of their income. After factoring in the effects of the recent market downfall – where average 401(k) accounts decreased 18% during 2008 – a new Hewitt analysis shows that most workers are now on track to replace just 81% of their income.
In other words, Hewitt said, a typical 55-year-old employee with a current average 401(k) savings rate of 10% will need to save an additional 12% each year until age 65, or work two more years, to replace what was lost in 2008. The average 40- year-old with a current average 401(k) savings rate of 7% must work one more year or save an additional 1% of pay per year until age 65, according to the news release.
Even if employees are able to recoup their losses from the recent market tumble, Hewitt found projected retirement income levels are still expected to fall short. According to Hewitt’s analysis, before the financial downturn, an average 40-year-old with 10 years of service, earning $83,000 at retirement in today’s dollars needed to save enough to provide $104,500 per year in retirement, but was only saving enough to provide $70,500 – a $34,000 annual shortfall. Since the downturn, that shortfall has grown to $37,350 a year, or a lump sum amount of approximately $400,000.