NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Retirement Assets Will Come Largely from 401(k) Plans

"...401(k) assets almost surely will be an important component of the retirement wealth of future generations of retirees."

A large fraction of families approach retirement with virtually no personal financial assets (which do not include balances in IRAs, 401(k)s, or other personal retirement accounts) saved. The median level of personal financial assets -- that is, the point at which half of families own more and half less -- was about $7,000 in 1992 for family heads aged 51 to 61, according to government data gathered in the Health and Retirement Study. A very substantial group of families rely almost exclusively on Social Security benefits for support in retirement.

But the spread of 401(k) plans could change this picture substantially, according to NBER Research Associates James Poterba, Steven Venti, and David Wise. In 1993, 401(k) plan contributions exceeded $69 billion. Between 45 and 50 percent of all employees were eligible for 401(k) plans in that year. Over 70 percent of those who were eligible to contribute did in fact make contributions.

In Implications of Rising Personal Retirement Saving (NBER Working Paper No. 6295), Poterba, Venti, and Wise simulate the assets of future generations of retirees and compare these assets with the present discounted value of Social Security benefits and the other assets of households whose members are approaching retirement now. Their results show that 401(k) assets almost surely will be an important component of the retirement wealth of future generations of retirees.

The authors find that on average a 37-year-old in 1996 would have a 401(k) balance upon retirement at age 65 of $91,600 and a 27-year-old in 1996, retiring at age 65, would have $125,500. These balances are measured in "1992 dollars," that is correcting for future changes in the price level. The calculations assume that half of the 401(k) money was invested in stocks and half in bonds. If all of it was put into stocks, then the 37-year-old in 1996 would have $181,500, and the 27-year-old $256,000, when they reached age 65. Those asset levels assume an average annual real rate of return on corporate bonds of 2.8 percent, and on the Standard & Poor's 500 stock index of 9.5 percent, the average returns since 1926. The authors have made conservative assumptions as to what proportion of their wages employees will set aside, based on historical experience.

Based on past experience, the authors also assume that eligibility rates, participation rates, and amounts contributed will increase over time. Their projections suggest that the lowest earnings decile may have very little in 401(k) assets. But for families with lifetime earnings above the lowest two or three deciles (the bottom 20 or 30 percent of earnings), 401(k) assets are likely to be substantial relative to the value of future Social Security benefits or relative to other wealth. And for families with lifetime earnings above the median, 401(k) assets could exceed Social Security wealth. This would almost surely be true for families in the top four earnings deciles. The authors conclude that "We believe that 401(k) assets will almost surely be an important component of the retirement wealth of future generations of retirees and could be the dominant component for a large fraction of them."


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