To better manage expectations and help workers plan, the Social Security Administration has long provided an estimate of future benefits. Calls to do something similar in the defined contribution space routinely arise, and recent research from Empower Retirement reinforces why.
The Denver-based company released the results of a six-year study that finds individuals who “are exposed to a projected view of their future monthly income will likely have higher expected income replacement rates in retirement.”
Specifically, projected income replacement scores in their retirement plans rose from 68 percent to 77.8 (or 14.4 percent), on average, over the study’s period.
The report, titled “Experience Matters: The Connection Between Personalized Projected Retirement Income and Retirement Readiness” is based on an analysis of some 300,000 active participants in 569 retirement plans managed by Empower.
Traditionally, retirement savers were presented with an accumulated balance of assets to demonstrate retirement savings. In 2010, Empower said it “began communicating to individuals in both forms—monthly income replacement rate and accumulated balance—based on the idea that the monthly income rate was more meaningful to individuals.”
In addition to the income replacement findings, the study also shows that when individuals view their projected monthly income in retirement, those who act increase their savings rate by 18.8 percent (7.07 percent to 8.4 percent), on average.
The findings are transferable to other areas of financial wellness and outcomes, and specifically health care planning. The company found that when individuals gain insights into what their health costs in retirement may be when presented in manageable monthly dollars, “they are not discouraged by such information, but instead save more to meet that estimated expense, lifting their deferral rates by more than 22 percent (8.64 percent to 10.54 percent).
And in a nod to the power of peer influence, individuals also reacted positively when presented with data that shows how much their peers are saving and have already accumulated.
The average savings increase that occurred was just under 22 percent (7.8 percent to 9.49 percent). Of all the savings rate changes that were made, nearly 90 percent were positive.