Autopsy of a Retirement Plan

May 25, 2018 / Amanda Chase, Horsesmouth Assistant Editor

As Eastern Connecticut State University professor James W. Russell approached age 65 after 37 years of university teaching, he took stock of what his retirement income would look like. The numbers were disappointing, to say the least. In the article “Autopsy of a Retirement Plan,” he examines his saving and investing practices over the years, to see what he could have done differently. What follows are some of the article’s highlights:

“Many retirement experts claim that at least 70% of preretirement income is necessary to maintain one’s standard of living. For example, someone whose final annual income will be $100,000 should have as a goal an income of $70,000 in retirement. I ran the numbers for my Social Security and my employer’s defined-contribution plan, in which I had participated for thirty-one years. This 401(a) plan, which functions in the same way as a 401(k), had been administered at various times by TIAA, ING, and Prudential. Together, my projected Social Security and employee retirement plan would amount to just 43.5% of my final income. The monthly Social Security check accounted for 19.5%; the annuity income option for my defined-contribution plan, 24%.

“Something had gone terribly wrong. Despite having accumulated almost a half-million dollars, which is much more than the $125,000 average for people approaching retirement, I did not have enough to finance a retirement that would allow me and my family to maintain the middle-class standard of living that my $117,615 final salary as a university professor afforded. Was I at fault? Had I not saved enough or made poor investing decisions? Or was the game rigged against me and, by implication, anyone else participating in such plans? Was it possible that even if I had saved and invested more responsibly I would have still ended up without enough retirement income?

“Social Security was designed to replace far less than 70% of preretirement income—it replaced just 19.5% of mine. The assumption was that employer-sponsored plans, which at the time were mainly in the form of traditional pensions, would be a greater source of income replacement that would be enough to make up the balance. Today, though, Social Security is the biggest source of retirement income for most people. It accounts for more than half the income of 48% of married couples and 71% of unmarried persons over sixty-five.

“The question of why I was having just 19.5% of my income replaced was quickly answered. My 19.5% was a percentage of my final salary, whereas Social Security’s statistics are based on thirty-five-year career averages. It doesn’t release statistics based on final salaries. I quickly calculated my career average salary and found the replacement value of it, using Social Security’s methodology, to be closer to 44%. For most, there’s a tremendous difference between replacement of final and average career income. For those who have received raises throughout their work lives, income at age sixty-five is markedly higher than income twenty years earlier.

“It’s understandable why the Social Security Administration releases data on average rather than on final income replacement, given that its retirement income calculation is mostly based on the thirty-five highest years. These figures also avoid the problems of determining how to calculate final incomes when there are career patterns for which replacement ratios for final incomes would be misleading and inadequate in terms of retirement-income needs. But it is nevertheless confusing for those trying to prepare for retirement and predict their income. The Social Security Administration has appropriate data and should use them to calculate final as well as average income replacement.”


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