Empower Finds Four Drivers to Lifetime Income Success

The 58% replacement rate (including Social Security), found in the fifth edition of this research, is a slight dip from last year’s reading of 61%.

Although the research covering 4,000 Americans found that lifetime income scores—the trajectory to replace current income in retirement—are driven much more powerfully by savings behavior than by income level, Empower’s research found there were four factors that had the most influence on retirement preparedness. These factors are access to a workplace retirement plan; participating in a defined contribution plan and deferring 10% or more of income; having automatic deferral escalation inside the DC plan; and having a professional financial adviser.

The differences when those factors are considered are great. For example, those with a workplace plan are on track to replace 74% of income, while those without have a replacement rate of 42%.

In regards to automatic escalation, adoption of this key factor has hit a plateau. Edmund F. Murphy III, president of Empower Retirement, believes slowing uptake of automatic escalation may in part be determined by whether the decision to adopt is driven by the HR or finance groups at a plan sponsor. Murphy says when this plan design element is not in place, participants can be helped by engaging with some of Empower’s online participant tools, such as the peer comparison and the health cost estimator, that may encourage them to increase their deferral rates.

Having a professional financial adviser (individuals paying for advice are on track to replace 82% of income, compared to those without a paid adviser having a replacement rate of 55%). This can be related to two findings, notes W. Van Harlow, research director, Empower Institute: those who work with an adviser typically have a plan and are also allocated differently, with less allocated to cash. In fact, although savings portfolios outside qualified retirement plans continue to hold a great deal of cash, at 36%; within qualified plans, the cash position is even higher (55%) unless the worker has an adviser (cash drops to 35%).

Murphy says this year’s methodology in calculating the lifetime income score was changed to include health state, which has a large influence on costs and how one needs to save for retirement. As the percentage of healthy households—defined as not having someone with one of the six major health states—declining as people age (from 43% for ages 30 to 39 to 21% for ages 60 to 65), and more of their existing retirement savings needing to be earmarked for healthcare, he says.

Overall, Murphy says that evaluating the overall Lifetime Income Score numbers made him believe that the status of the nation’s security is not in crisis, as some have said, but rather, the nation has “a retirement savings challenge,” which requires the country to strengthen and enhance the current system. He indicates that the 2015 Lifetime Income Score research, which is released by the newly-launched Empower Institute, provides “a roadmap” to important opportunities for employees, employers, retirement plan advisers and consultants, and policy makers.