401ks Work—These Numbers Prove It

Good news for retirement savers

401k, retirement, income, savingsShe just saw her 401k balance.

What retirement crisis? Most Americans are achieving a solid income replacement rate in retirement, at least according to the ICI and IRS.

The Investment Company Institute joined with the popular revenue gathering arm of the United States government to study retirees’ spendable income, and found 103 percent was replaced. However, there’s a catch, as the figure included the claiming of Social Security benefits.

Nonetheless, the new analysis examined tax data from 1999 to 2010 and found that for most individuals, Social Security benefits combined with retirement income vehicles like 401ks and other employer-sponsored retirement plans, annuities, and IRAs, “provide substantial income.”

Social Security is relatively more important for lower-income individuals, it added, retirement income matters more to higher-income individuals, and those in the middle receive a similar amount of income from both sources.

“The vast majority of workers we analyzed reported retirement resources other than Social Security,” Peter Brady, ICI economist and one of the report’s authors, said in a statement. “Indeed, 89 percent of individuals held or drew income from employer plans, annuities, and IRAs.

The results, Brady notes, suggest that a much higher share of retirees get income from these sources than reported in government surveys, and adds to the mounting evidence that household survey data understate retiree income.

Of the 89 percent of individuals who had non-Social Security retirement resources, 81 percent received income, either directly or through a spouse, from employer plans, annuities, or IRAs.

Another 8 percent had evidence of these resources—a Form 1099-R (reporting a rollover or other retirement account transaction that did not generate income), a Form 5498 (indicating IRA ownership), or both—but were not yet drawing on them.

The authors followed working taxpayers aged 55 to 61 in 1999 who did not receive Social Security benefits in 1999 using data from the IRS’s SOI Division. The analysis primarily focused on spendable income from the combination of labor income, Social Security benefits, and retirement income (distributions from employer plans, annuities, and IRAs).

The research compares taxpayers’ spendable income, as reported on their tax returns and on information returns provided to the IRS, three years after they claim Social Security with their spendable income the year before they claimed.

The 103 percent replacement rate for the median taxpayer indicates that spendable income rose for more than half of taxpayers. Median replacement rates three years after claiming were higher for individuals in the lowest income quintile (123 percent), and lower for top earners (95 percent for the top 1 percent of the income distribution).

2 Comments on "401ks Work—These Numbers Prove It"

  1. Is this specifically for defined contribution plans? Or all employer plans, including defined benefit?

  2. John Sullivan | April 20, 2017 at 7:28 am | Reply

    ICI verified that it includes defined benefit plans as well as defined contribution, and examined each when combined with Social Security.

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