On track to replace, on average, more than 90 percent of their income in retirement
Underscores importance of strong employer and employee contribution rates and benefits of an income replacement approach to retirement planning
NEW YORK–(BUSINESS WIRE)– Research released today from TIAA-CREF’s new Retirement Income IndexSM shows not-for-profit sector plan participants are estimated to replace an average of more than 90 percent of their pre-retirement income in retirement.
“As people live longer in retirement, and costs continue to rise for healthcare and basic living expenses, the stakes for retirement planning have been raised dramatically,” said Teresa Hassara, president of Institutional Retirement at TIAA-CREF. “In this environment, employers who look only at their employees’ account balances can feel a false sense of security. Ultimately, employees’ ability to replace the income they earned while working will determine whether they can maintain their standard of living in retirement.”
The Retirement Income Index is based on a study of 500,000 employees actively contributing to TIAA-CREF retirement plans as of December 31, 2014. The high ratio underscores the impact of a number of factors on individual and plan outcomes: a robust combined employer and employee contribution rate (an average of 14 percent for TIAA-CREF participants), access to personalized financial advice and the inclusion of guaranteed lifetime income options, such as fixed annuities.1
TIAA-CREF retirement plan participants’ average plan account balance is approximately $177,0002 (as of December 31, 2014), nearly twice the industry average of $91,3003 (as of December 31, 2014). However, an important financial retirement readiness measure is income replacement, as this is the metric that determines whether individuals will be able to meet their essential living expenses.
The index shows participants’ income replacement ratio, which is a person’s projected after-tax income after retirement divided by his or her after-tax salary before retirement. The methodology used to calculate the index assumes a retirement age of 67 and includes full benefits from Social Security. TIAA-CREF participants’ average income replacement ratio of more than 90 percent is in line with industry experts’ recommendation that individuals aim to replace 70 percent to 100 percent of their pre-retirement income.
Key highlights from the index:
- Employees generally can expect to receive more than 90 percent of their pre-retirement income in retirement, with 53 percent of that coming from guaranteed sources such as Social Security (47 percent) and fixed annuities (6 percent), and the balance from variable sources such as mutual funds and variable annuities.
- Participants younger than age 40 have an average income replacement ratio of 110 percent. In this case, however, the number doesn’t tell the whole story. These participants are generally saving less than their older counterparts, and the projections show they are more reliant on Social Security than on their own investments for their guaranteed income.
- Participants age 67 or older have an average income replacement ratio of 107 percent. This is driven by higher average savings rates and account balances, but also reflects less reliance on Social Security for guaranteed lifetime income.
“The findings of the Retirement Income Index are a great testament to our clients’ use of best-practice plan design and investment solutions, coupled with our focus on lifetime income,” continued Hassara. “There will always be more work to be done, but the collaboration between TIAA-CREF and our clients is clearly helping employees achieve long-term financial well-being.”
The data is derived from TIAA-CREF’s Plan Outcome Assessment (POA), a consultative service that enables plan sponsors to analyze and evaluate their plan’s goals, design and investment choices, as well as employee demographics and behaviors. POA gives plan sponsors a foundation to determine whether their retirement plan is meeting its objectives, allowing them to make changes to help strengthen employees’ retirement readiness.
“The Retirement Income Index uses the same basic methodology as our Plan Outcome Assessment, which we use to measure each institution’s retirement program,” noted Hassara. “The assessment provides employers with vital information they need to help ensure their employees are on track to meet their retirement expenses in their later years by measuring retirement income from various sources, such as annuities, Social Security and mutual funds. It also indicates what percentage of participants’ income comes from guaranteed sources, which is critical in determining whether individuals will have a steady, reliable stream of income to cover their essential living expenses in retirement.”
For more information, read the Retirement Income Index Guide http://www-mgmtweb-cha.tiaa-cref.org/public/pdf/retirement_income_index_guide.pdf. For more information about Plan Outcome Assessment and other resources TIAA-CREF offers to plan sponsors to promote active employee engagement in retirement planning, visit https://www.tiaa-cref.org/public/retirement-readiness/retirement-readiness.
TIAA-CREF (www.tiaa-cref.org) is a national financial services organization with $869 billion in assets under management (as of 6/30/2015) and is the leading provider of retirement services in the academic, research, medical and cultural fields.
Please note: An individual’s income replacement ratio will vary from the study’s estimated rate based on a number of unique individual factors. Study results are not intended to project an individual’s actual ratio. TIAA-CREF Retirement Income Index data are as of 12/31/2014, based on 501,639 actively contributing participants from 303 TIAA-CREF record-kept plans. Using the participant’s current salary, age, contribution rates (employer/employee), asset allocation and an assumed retirement age of 67, TIAA-CREF leverages the advice engine from Ibbotson Associates, Inc., an independent expert retained by TIAA-CREF, to calculate the projected retirement income stream (including estimated Social Security benefits) in current dollars as a percentage of current salaries using Monte Carlo analysis (500 total simulations). The results indicate the participant’s 70 percent probability of achieving the retirement goal. A lower probability of success is associated with better (and less likely) estimated income; a higher probability is associated with lower estimated income. Please note the median income replacement ratio based on the analysis above is approximately 88 percent.
The Ibbotson tool’s advice is based on statistical projections of the likelihood that an individual will achieve their retirement goals. The projections rely on financial and economic assumptions of historical rates of return of various asset classes that may not reoccur in the future, volatility measures and other facts, as well as information the individual provides.
IMPORTANT: Projections, and other information generated through the Retirement Income Index and the Ibbotson tool regarding the likelihood of various investment outcomes, are hypothetical, do not reflect actual investment results, and are not a guarantee of future results. Results may vary with each use and over time.
Past performance does not guarantee future results. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, members FINRA and SIPC, distribute securities products.
©2015 Teachers Insurance and Annuity Association of America–College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017.
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1 Guaranteed lifetime income is subject to TIAA’s claims paying ability.
2 Average across 500,000 employees in the Retirement Income Index actively contributing to TIAA-CREF retirement plans as of December 31, 2014.
3 Source: CNNMoney January 2015.