Retirement in the Age withOUT Defined Benefit Pensions

A new study from the Center for Retirement Research at Boston College by Alicia H. Munnell, Rebecca Cannon Fraenkel, and Josh Hurwitz reveals just how poorly baby boomers are positioned for retirement in light of the shift to defined contribution pension plans (401(k)s principally).  According to this research, in the model a worker who reaches peak earnings of about $65,000 at retirement, and who put away 6% per year with an employer match of 3%, would accumulate about $363,000; a two-worker household with both earning the same would have double that.  Yet the Federal Reserve's Survey of Consumer Finances indicates that in 2010 a typical household close to retirement age only had about $120,000 in 401(k)s and IRAs - enough to purchase an annuity of about $575 per month.  (Presumably this is not an inflation-adjusted annuity like Social Security.)

Why the discrepancy?  First, there are a large number of businesses that don't offer 401(k) plans in the first place.  Second, of those that do off plans the participation rate of 79% is not as good as might be hoped.  Further, workers don't always maximize their participation.  For these reasons, overall only 42% of the private sector workforce participates in such a plan.  (The public sector workforce effectively has 100% coverage.) 

This data further underscores the importance of finding a strategy for waiting to claim Social Security benefits until age 70 when they are typically 76% higher before adjustment for any inflation).  Locking in the higher benefit level for life is undoubtedly the single biggest step to take to ensure greater financial security.  This is particularly so for those who are near retirement age and have few other options for accumulating financial wealth.