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CCH® PENSION — 08/13/12

401(k) plan eligibility key factor in retirement readiness, EBRI finds

Eligibility for participation in a workplace 401(k) plan is one of the single most important factors in closing the retirement savings gap for Generation X, according to a new report by the Employee Benefit Research Institute (EBRI).

The EBRI, which has extensively measured retirement readiness levels using its Retirement Security Projection ModelTM since its launch in 2003, recently focused on Gen Xers (those born between 1965–1974). Earlier EBRI research has found that, overall, about 44% of both Baby Boomer and Gen Xer households are likely to be at risk of running short of funds during retirement, assuming they retired at age 65 and retained any net housing equity in retirement until other financial resources were depleted. However, EBRI’s modeling reveals great variability in that overall percentage, with a key factor being how long a Gen X worker will be eligible to participate in a defined contribution retirement plan such as a 401(k) plan.

The report found that for those with no future years of eligibility, the average retirement savings shortfall is projected to be approximately $78,000 per individual. However, those Gen Xers with at least 20 years of future eligibility are projected to have an average financial shortfall at retirement of approximately $23,000.

Health care expenses

But for Gen Xers trying to calculate how much they will need in retirement, the EBRI found that taking potential nursing home and home health care expenses into account is crucial to a realistic estimate of retirement savings needs.

For example, with nursing home and home health care expenses modeled, 68% of single male Gen Xers are projected to have no financial shortfall in retirement. On the other hand, if these expenses are ignored, more than 90% of this group would appear to have no projected shortfall.

"Ignoring the impact of nursing home and home health care costs in retirement significantly overstates the likelihood of retirement income adequacy," said Jack VanDerhei, EBRI research director and author of the report. "Any realistic calculation of retirement needs has to include those expenses," he added.

Source: EBRI press release #977

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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