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!

3 thoughts on “3 Times the Contribution Rate!

  1. Good Morning Russ: I was contributing 26.5 % of my hourly wage when I retired in 2015. I see new entrants on the application for SFA funds contributing 45%. I realize as a investment not all contributions are invested for money is taken for the operation of the fund. Sort of like a load fund but is a pension. So would they be better off investing out of the pension fund themselves. Not very unlikely. However the employer will never give them that kind of money out of the fund. Many employers won’t even give 3%. Of course your thoughts are always appreciated. Joe

    • Hi Joe – Sorry for the delayed response. You were contributing 26.5% of your wages to a pension? I believe that pension plans offer the better bargain than managing funds on one’s own. The monthly annuity feature and no longevity risk are great. Furthemore, they tend to provide these features at lower cost. The average worker is not going to be able to manage these assets as well as the professionals. Have a great evening. Russ

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