Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates

A key weakness of many retirement income models is that they use average estimates for life expectancy, and, consequently, provide workers with only a 50 percent chance of having adequate income in retirement. The Employee Benefit Research Institute (EBRI) has developed a new model - the EBRI/ERF Retirement Security Projection Model® (RSPM) - that incorporates a wide range of data in order to produce a far more inclusive and refined projection of likely retirement income. In projecting retirement income needs, the new EBRI model incorporates three of the most critically important, but difficult-to-model, retirement risks: investment risk, or how individuals' assets will perform during retirement; longevity risk, or how long an individual expects to live; and catastrophic health care costs, which have the potential to wipe out retirement savings. The EBRI model finds that the amount of money Americans will need for an adequate retirement varies widely based on individual factors and often is substantially higher than previously estimated. This paper presents the results obtained by utilizing the concepts already adopted by RSPM for the entire population of certain age cohorts and applying them to stylized examples. These results will provide useful information for individuals attempting to include such crucial factors as longevity, investment, and health care risk into their retirement planning process.

Defined Benefit Plan Freezes: Who's Affected, How Much, and Replacing Lost Accruals

This paper quantifies how workers are likely to be affected by pension freezes, and how much they would have to save in a 401(k) plan - whether provided by their employer and/or saved by themselves - to offset the loss of accrued benefits from the pension freeze. The analysis notes that how an individual worker might be affected by a pension freeze varies widely, based on the unique nature of each pension plan and the terms of each plan that is frozen; the variation in workers' age, and tenure; and future investment results. The analysis presents its findings in terms of additional compensation (in a 401(k) plan, whether provided by an employer or worker) needed to cover the accruals lost to a pension freeze. In some cases, the pension plan sponsor offsets the pension freeze by increasing its match in the workers' 401(k) plan, but each case is different, and in some cases the lost pension benefit is not replaced.