3 Times the Contribution Rate!
By: Russ Kamp, Managing Director, Ryan ALM, Inc.
Rising inflation, higher interest rates, growing levels of debt, and a generally higher cost of living across the board are weighing on the average American. All of this is happening just as October Three Consulting is out with a report estimating that contribution rates into defined contribution plans will have to increase by 3 X for a 25-year-old hoping to retire in 2063 relative to someone who retired in 2000. A replacement of 80% of one's final salary once took a little more than 4% of pay to accomplish the objective. October Three is estimating that it will now cost nearly 14% of pay year in and year out to achieve this target. Good luck with that!
American workers who are fortunate to have access to a DC plan are contributing on average 7%, which is about half what October Three has calculated as the necessary contribution rate. Furthermore, that contribution rate was as of 2020, when many Americans were more flush during Covid-19 than they are today. Unfortunately, the retirement angst being felt isn't reserved for the American worker. A new survey by the National Payroll Institute and the Financial Wellness Lab of Canada, which interviewed 3,000 Canadian workers, indicated that those saving between 1% and 5% of their pay increased to 34%, up from 27% in 2021. Regrettably, 9% of respondents said they aren’t saving anything. Furthermore, a significant majority of those in the survey indicated that they are financially stressed!
"Employees who said they’re stressed are living closest to their limits, with 91% spending all or more than their net pay, up from 82% in 2021." Given these numbers, just how does a worker increase their contribution rate to as much as 14%? Is a dignified retirement no longer a possibility? Will this situation get even worse where loans and early withdrawals from DC plans escalate as costs increase further? Finally, who said that a supplemental savings plan should become everyone's "retirement plan". Most Americans and Canadians don't have any supplemental income at this time! As a result, they aren't likely going to have a retirement fund sufficient enough to achieve the objective. Great policy decision!