Retirement Savings: How Much Will Workers Have When They Retire?

Retirement Savings: How Much Will Workers Have When They Retire?

Order Code RL33845
Retirement Savings: How Much Will Workers Have
When They Retire?
January 29, 2007
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Debra B. Whitman
Specialist in the Economics of Aging
Domestic Social Policy Division

Retirement Savings: How Much Will Workers Have
When They Retire?
Summary
Over the past 25 years, an important change has occurred in the structure of
employer-sponsored retirement plans in the private sector. Although the percentage
of the workforce who participate in employer-sponsored retirement plans has
remained relatively stable at approximately half of all workers, the type of plan by
which most workers are covered has changed from defined benefit (DB) pensions to
defined contribution (DC) plans. The responsibilities of managing a DB plan —
making contributions, investing the assets, and paying the benefits to retired workers
and their survivors — lie mainly with the employer. In a typical DC plan, the
worker must decide whether to participate in the plan, how much to contribute, how
to invest the contributions, and what to do with the money in the plan when he or she
changes jobs or retires. As a result of the shift from DB plans to DC plans, workers
today bear more responsibility for preparing for their financial security in retirement.
According to data collected by the Federal Reserve Board, 45% of households
in which the householder or spouse was employed contributed to employer-sponsored
retirement plans in 2004, and 58% owned a retirement account of any kind. Among
married-couple households in which the householder was under age 35, the median
balance in all retirement accounts owned by the household was $19,000 in 2004.
Among unmarried householders, the median retirement account balance in 2004 was
just $7,000. Among married-couple households headed by individuals between 45
and 54 years old, median retirement assets in 2004 were $103,200. Unmarried
householders aged 45 to 54 had a median balance of $32,000. Most households that
participated in defined contribution plans in 2004 contributed between 3% and 10%
of pay to the plan. Younger households with median earnings contributed about 5%
of pay, while median-earnings households 45 and older contributed about 6% of pay.
The report also presents the results of an analysis of the amount of retirement
savings that households might be able to accumulate by age 65 under a number of
different scenarios. The analysis shows how varying the age at which households
begin to save for retirement, the percentage of their earnings that they save, and the
rate of return on investment can affect the amount of retirement savings the
household will accumulate. Using Monte Carlo methods that simulate the variability
of investment rates of return, we found that a married-couple household that
contributed 8% of pay annually for 30 years beginning at age 35 to a retirement plan
invested in a mix of stocks and bonds could expect have accumulated $468,000 (in
2004 dollars) by age 65 if rates of return were at the median over the 30-year period.
Nevertheless, given the variability of rates of return, there is a 5% chance that the
couple would have $961,000 or more and a 5% chance that the couple would have
$214,000 or less. Higher contribution rates and longer investment periods lead to
higher account balances, but also increase the impact of the variability of investment
rates of return. At a 10% contribution rate over 30 years, the household could expect
to accumulate $594,000, with a 90% probability that account would total between
$301,000 and $1.2 million. Saving 8% of pay over 40 years, the household could
expect to accumulate $844,000, with a 90% probability that the account would total
between $370,000 and $2 million. This report will not be updated.

Contents
Trends in Retirement Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Growing prevalence of defined contribution plans . . . . . . . . . . . . . . . . 2
The Survey of Consumer Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Retirement Savings of American Households . . . . . . . . . . . . . . . . . . . . . . . . 4
Retirement account balances in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Amount of contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
How much might workers accumulate by Age 65? . . . . . . . . . . . . . . . . . . . 12
Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
What is “Monte Carlo” Analysis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Simulation Results: Retirement Account Balances at Age 65 . . . . . . . . . . . 15
Variability of investment rates of return . . . . . . . . . . . . . . . . . . . . . . . 15
Length of investment period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Contribution rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Household earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Simulation Results: Measuring retirement income adequacy . . . . . . . . . . . 20
Annuities: Insurance against longevity risk . . . . . . . . . . . . . . . . . . . . . . . . . 22
Measuring earnings replacement rates . . . . . . . . . . . . . . . . . . . . . . . . . 23
Married couples versus singles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Detailed simulation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
List of Figures
Figure 1. Effect of variability in investment rates of return on
retirement savings at age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 2. Effect of age at which saving begins on
retirement savings at age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Figure 3. Effect of annual contribution rate on
retirement savings at age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Figure 4. Effect of household earnings on retirement savings at age 65 . . 20
Figure 5. Effect of investment rate of return on
earnings replacement rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 6. Estimated retirement savings at age 65
of married couple and unmarried householders . . . . . . . . . . . . . . . . . . 27
Figure 7. Earnings replacement rates at age 65
of married couples and unmarried householders . . . . . . . . . . . . . . . . . 27
List of Tables
Table 1. Number of Plans and Active Participants, by Type of Plan,
1980-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Table 2. Household Participation in Defined Contribution Plans at Current
Employer in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3. Household Retirement Account Balances in 2004 . . . . . . . . . . . . . . . . . 8
Table 4. Contributions to Employer-sponsored Plans in 2004 . . . . . . . . . . . . . . 10
Table 5. Contributions to Employer-sponsored Plans in 2004 . . . . . . . . . . . . . . 11

Table 6. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 8% of Household Earnings . . . . . . . . 30
Table A1. Household Earnings in 2004, by Age and Marital Status of
Householder and Percentile Rank of Earnings . . . . . . . . . . . . . . . . . . . . . . 34
Table A2. Annual Total Return on Stocks and Bonds and Annual Rate of
Change in the Consumer Price Index, 1926-2005 . . . . . . . . . . . . . . . . . . . . 35
Table A3. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 6% of Household Earnings . . . . . . . . 36
Table A4. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 10% of Household Earnings . . . . . . . 37

Retirement Savings: How much will workers
have when they retire?
Trends in Retirement Plan Design
Over the past 25 years, an important change has occurred in the structure of
employer-sponsored retirement plans in the private sector. Although the percentage
of the workforce who participate in employer-sponsored retirement plans has
remained relatively stable at approximately half of all workers, the type of plan by
which most workers are covered has changed. In 1980, the majority of workers
participated in defined benefit (DB) pensions. (See Table 1.) Generally, workers in
DB plans do not have to elect to participate. All covered workers earn benefits under
the plan, and the benefits typically are based on the number of years of service by the
employee and some measure of the worker’s average salary. At retirement, benefits
typically are paid as an annuity that provides the retiree with a monthly income for
life. The Employee Retirement Income Security Act of 1974 (ERISA, P.L. 101-508)
requires an employer that sponsors a defined benefit (DB) plan to establish a trust
fund that holds assets sufficient to pay the retirement benefits earned by the workers
who participate in the plan.1 The responsibilities of managing a DB plan — making
contributions, investing the assets, and paying the benefits to retired workers and
their survivors — lie mainly with the employer.
Table 1. Number of Plans and Active Participants, by Type of
Plan, 1980-2003
Year
DB Plans DB Participants DC Plans DC Participants
1980
148,096
30,100,000
340,805
18,886,000
1985
170,172
28,895,000
461,963
33,168,000
1990
113,062
26,205,000
599,245
35,340,000
1995
69,492
23,395,000
623,912
42,203,000
2000
48,773
22,218,000
686,878
50,874,000
2003
47,036
21,304,000
652,976
51,828,000
Note: Active participants are workers participating in plans at their current jobs.
Source: U.S. Department of Labor, Private Pension Plan Bulletin: Abstract of
Form 5500 Annual Reports, various years.
1 ERISA governs only private-sector plans. Retirement plans offered by state and local
governments to their employees are governed by the statutes of those jurisdictions.
Retirement plans for federal employees are governed by Title 5 of the United States Code.
Unlike private plans, most government-sponsored DB plans require employee contributions.

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Today, a majority of workers participate in 401(k)-type plans rather than in
traditional defined benefit pensions. These are called defined contribution (DC)
plans. Defined contribution plans are much like savings accounts maintained by
employers on behalf of each participating employee. In a typical DC plan, the worker
must decide whether to participate in the plan, how much to contribute, how to invest
the contributions, and what to do with the money in the plan when he or she changes
jobs or retires. Thus, in a DC plan, it is the employee who bears the investment risk
and who is ultimately responsible for prefunding his or her retirement income. As a
result of the shift from DB plans to DC plans, workers today bear more responsibility
for preparing for their financial security in retirement. Decisions that workers make
— or fail to make — from the time that they first enter the workforce can have a
substantial impact on their wealth and income many decades in the future.
Understanding how workers have responded to these challenges and opportunities
may help Congress develop policies that will assist workers in making the best
possible decisions to provide for their financial security in retirement.
This CRS report presents information on trends in retirement plan design and
then summarizes data collected by the Federal Reserve Board on the retirement
savings accumulated by workers and the rates at which they are saving for retirement.
The report also presents the results of an analysis conducted by CRS on the amount
of retirement savings that workers might be able to accumulate by age 65 under a
number of different scenarios. The analysis shows how varying each of several
factors, including the age at which households begin to save for retirement, the
percentage of their earnings that they save, and the rate of return on investment can
affect the amount of retirement savings the household will accumulate. We then
convert the accumulated savings into an annuity to illustrate the share of pre-
retirement earnings that the accumulated retirement savings could replace.
Growing prevalence of defined contribution plans. The rapid growth
of defined contribution plans began in the 1980s. In 1978, Congress added section
401(k) to the Internal Revenue Code, which allowed employees to contribute part of
their current pay into a retirement plan on a pre-tax basis.2 In 1981, the Internal
Revenue Service (IRS) published regulations for “cash or deferred arrangements”
established under §401(k), into which employees can make pre-tax contributions, and
in which interest, dividends, and capital gains accrue on a tax-deferred basis until the
money is withdrawn.3 Since that time, DC plans have overtaken defined benefit
pensions in the number of plans, the number of participants, and total assets. In
2006, only 20% of all workers in the private sector were included in defined benefit
pension plans, while 43% participated in defined contribution plans. About 12% of
workers participated in both types of plan.4
2 Defined contribution plans had existed for many years, but prior to enactment of I.R.C.
§401(k), they were funded by employer contributions or after-tax employee contributions.
3 401(k) plans cover mainly workers in for-profit businesses in the private sector. Workers
in non-profits are sometimes covered under 403(b) plans and workers in state and local
governments are sometimes covered under 457 plans.
4 The Labor Department reports that 51% of private sector workers were in any type of plan.
Twenty percent were in DB plans and 43% were in DC plans. (43% + 20% - 51% = 12%).

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DB and DC plans also differ with respect to participation. In general, all
workers who meet the requirements for coverage under a DB plan automatically earn
benefits under the plan. The employer prefunds the benefits that will be paid to all
eligible employees when they reach retirement age. In contrast, in most DC plans,
the employee must elect to participate. The employee also must decide how much
to contribute to the plan, and how to invest the contributions. According to the U.S.
Department of Labor, 20% of workers whose employers sponsored DC plans did not
participate in these plans in 2006.5
One way to boost enrollment in DC plans would be to enroll all eligible
employees automatically. More firms, particularly among large employers, have
adopted automatic enrollment in recent years. According to the Profit Sharing/401(k)
Council of America, 17% all 401(k) plans had automatic enrollment in 2005, up from
11% in 2004. Automatic enrollment had been adopted by 34% of plans with 5,000
or more participants by 2005, compared to just 4% of plans with fewer than 50
participants. The Pension Protection Act of 2006 (P.L. 109-280) contains provisions
that are intended to encourage employers to adopt automatic enrollment in defined
contribution plans. Plans with this feature will be exempted from certain tests for
discrimination in favor of highly-compensated employees, a practice that is
prohibited by law.
With the trend away from defined benefit plans to defined contribution plans,
workers now bear much of the responsibility of preparing for retirement. Workers
whose employers offer savings or “thrift” plans such as those authorized under
§401(k), §403(b), and §457 of the Internal Revenue Code can accumulate assets on
a tax-deferred basis while they are working. Most people with earned income also
can contribute to an individual retirement account (IRA). In 2007, IRA contributions
of up to $4,000 (or $5,000 for people 50 and older) are tax-deductible for workers
who are not covered by a retirement plan at work.6 In these plans, taxes are paid
when the funds are withdrawn, and a penalty may apply if the withdrawal occurs
before retirement. Another option is to save for retirement in a Roth IRA. Roth
IRAs accept only after-tax contributions; however, withdrawals from a Roth IRA
during retirement are tax-free.7
5 Fifty-four percent of workers in the private sector worked for employers who sponsored
defined contribution plans in 2006, and 43% of private-sector workers participated in DC
plans. Assuming that all workers whose employers sponsored a DC plan were eligible to
participate, these figures imply a participation rate of 80% among eligible employees.
(National Compensation Survey: Employee Benefits in Private Industry, U.S. Department
of Labor, Bureau of Labor Statistics, Summary 06-05, Aug. 2006, Table 2, page 7.)
6 For workers who are covered by a retirement plan at work, the tax deduction phases out
between $75,000 and $85,000 of adjusted gross income for a married couple filing a joint
return and between $50,000 and $60,000 of adjusted gross income for a single individual.
7 In 2007, unmarried workers can contribute to a Roth IRA if they have adjusted gross
income of less than $110,000. Married couples can contribute to a Roth IRA if they have
adjusted gross income of less than $160,000. Total combined contributions to both
traditional IRAs and Roth IRAs cannot exceed $4,000 for workers under age 50 and $5,000
for workers age 50 and older.

CRS-4
The Survey of Consumer Finances
This Congressional Research Service report presents data on retirement plan
participation and retirement savings account balances collected through the Survey
of Consumer Finances (SCF) in 2004, the most recent year for which survey data are
available. The SCF is an interview survey sponsored by the Board of Governors of
the Federal Reserve System in cooperation with the Department of the Treasury. It
is conducted once every three years to collect information on the assets and liabilities
of U.S. households, the sources and amounts of their income, their demographic
characteristics, employment, and participation in employer-sponsored health and
retirement plans. Data from the SCF are widely used by economists at the Federal
Reserve, other government agencies, and by private-sector research organizations and
academic institutions to study trends in the amount and distribution of assets and
liabilities among U.S. households. Since 1992, SCF data have been collected by the
National Organization for Research at the University of Chicago (NORC). In 2004,
4,522 households were interviewed for the SCF, representing a total of 112.1 million
U.S. households.8 Like all household surveys, the SCF is subject to reporting error.
Retirement Savings of American Households
According to the Survey of Consumer Finances, there were 84.7 million
households with one or more workers in 2004 and in 44.5% of these households
either the householder, the householder’s spouse, or both participated in a defined
contribution retirement plan.9 (See Table 2.) Some workers do not participate
because their employer does not offer a plan; however, data from the Department of
Labor indicate that among workers whose employer offers a DC plan, 20% do not
participate.10
Participation in employer-sponsored defined contribution plans varied with the
age and marital status of the householder. Participation was lowest among
households in which the householder was under age 35 (37%) and highest among
households in which the householder was between the ages of 45 and 54 (52%).
Participation was higher among married-couple households (51%) than among
unmarried householders (36%), partly because married-couple households had more
8 This report refers to households rather than to families because, according to the
researchers at the Federal Reserve Board, the unit of analysis in the SCF is more comparable
to the Census Bureau’s definition of a household than to its definition of a family. (For
more information, see Bucks, Kennickell, and Moore, Federal Reserve Bulletin, 2006.)
9 There were 112.1 million households in the U.S. in 2004, and 84.7 million households
(75.6%) in which either the householder or the householder’s spouse was employed at the
time the survey was conducted. We counted households as participating in the plan if the
household, the employer, or both contributed to a plan.
10 See National Compensation Survey: Employee Benefits in Private Industry, U.S.
Department of Labor, Bureau of Labor Statistics, Summary 06-05, Aug. 2006. Some
workers whose employer offers a plan may not be eligible to participate if they are under age
21, have less than one year of service, or work less than 1,000 hours in a year.

CRS-5
workers. However, married-couple households had higher participation rates at all
ages than households headed by unmarried persons.
Table 2 also shows the percentage of participating households in which either
the household, the employer, or both contribute to the plan. Ninety percent of
participating households reported that they contributed to the plan in which they
participated, while 83% reported that the employer contributed to the plan.11 Three-
fourths of all participating households reported that both the household and the
employer contributed to the plan.
Retirement account balances in 2004. Age and marital status are both
important considerations when evaluating the adequacy of a household’s retirement
savings. Couples obviously need more income to support themselves than single
persons (although they do not necessarily need twice as much income.)12 Younger
workers have more time to save than older workers, and can reap the benefits of
compound interest over a longer period. As the data presented later in this report will
demonstrate, workers who wait until middle age to start saving for retirement face
an uphill struggle in accumulating adequate retirement assets.
Table 3 shows the retirement account balances of households that owned one
or more retirement accounts in 2004, categorized by the age and marital status of the
household head. The first column shows the balances in all of the DC plans at the
current main jobs of the householder and his or her spouse. The second column
shows the balances in all retirement accounts owned by the household, including
accounts at their current jobs, balances held in accounts at former employers, and
balances in individual retirement accounts (IRAs). The third column of Table 3
shows the ratio of household retirement saving to annual household earnings. For
example, in the second row of Table 3, we see that among married-couple
households in which the householder was under age 35, the median balance in all
retirement accounts owned by the household was $19,000. This amount was equal
to 26.7% of the median annual earnings of those households. Similar ratios are used
later in this report to illustrate a measure of the adequacy of retirement savings.
Table 3 also shows the 75th percentile and the 25th percentile retirement of
account balances. At the 75th percentile, married couple households headed by
persons under age 35 had total retirement assets of $44,000. In other words, three-
fourths of married-couple households headed by persons under age 35 had total
retirement assets of $44,000 or less in 2004, while one-fourth of all such households
had total retirement assets of more than $44,000. At the 25th percentile, married
couple households headed by persons under age 35 had total retirement assets of
$5,400 in 2004.
11 In any particular instance it is possible that only the household or the employer
contributed to the plan. Assuming that each household answered the survey questions
correctly, those that reported that the household did not contribute to the plan would be
participating on the basis of employer contributions only.
12 In these tables, the householder is classified by his or her legal marital status at the time
the interview was conducted.

CRS-6
Among married-couple households headed by individuals between 45 and 54
years old, median retirement assets in 2004 were $103,200. Households headed by
unmarried individuals had retirement assets that were lower at every age than those
of married couples, both in absolute terms and as a ratio of their current earnings.
Among households headed by single persons between the ages of 45 and 54, for
example, median retirement assets in 2004 were $32,000, or less than a third of the
median retirement assets of married-couple households in this age group. Likewise,
at the 75th percentile, households headed by unmarried individuals between the ages
of 45 and 54 had total retirement assets of $80,000, compared to assets of $275,000
among married couple households in this age group. At the 25th percentile,
households headed by unmarried individuals between the ages of 45 and 54 had total
retirement assets of $11,400, compared to assets of $30,000 among married couple
households.
Eventually, most households will have to begin spending their retirement assets.
Most choose to do so through periodic withdrawals, while others choose to convert
some or all of their retirement assets into a guaranteed stream of income by
purchasing an annuity. An individual retiring at age 65 in January 2007 with
$119,500 — the median retirement account balance among married-couple
households head by persons age 55 and older — could purchase a level, single-life
annuity that would pay $826 per month ($9,912 per year) or a joint and 100%
survivor annuity paying $662 per month ($7,944 per year), based on the current
annuity interest rate of 5.25%.13 These amounts would replace just 19% and 15%,
respectively, of the median household earnings of $52,000 among all married-couple
households headed by individuals who were 60 to 64 years old in 2004.14
13 This is the interest rate on annuities issued by MetLife in January 2007.
14 Median household earnings in 2004 were calculated by CRS from Census Bureau data.

CRS-7
Table 2. Household Participation in Defined Contribution Plans
at Current Employer in 2004
Among participating households:
Households
with
Household
working
participates Household Employer(s)
Both
head or
in a DC
contributes
contribute
contribute
spousea
planb
to the plan
to the plan
to the plan
Age of householder
Under 35
22,880
36.6%
89.1%
85.0%
77.1%
35 to 44
21,601
49.6
88.6
83.0
73.5
45 to 54
20,693
51.9
90.7
80.9
72.5
55 or older
19,499
40.5
89.9
85.4
77.6
Marital status
Married householder
47,845
51.3
90.1
85.2
77.2
Single householderc
36,828
35.8
88.6
80.0
70.6
Married householder
Under 35
9,663
46.5
88.8
86.0
79.8
35 to 44
12,530
58.8
88.8
83.7
74.1
45 to 54
12,998
55.9
91.7
85.0
77.5
55 or older
12,654
42.8
90.7
86.7
78.7
Single householderc
Under 35
13,217
29.4
89.5
83.8
74.0
35 to 44
9,071
36.9
88.1
81.6
72.1
45 to 54
7,696
45.2
88.5
72.5
62.2
55 or older
6,845
36.1
88.2
82.3
75.1
Total
84,673
44.5%
89.6%
83.4%
74.9%
Source: CRS analysis of the Federal Reserve Board’s 2004 Survey of Consumer Finances.
a. Households with an employed householder and/or employed spouse/partner, in thousands.
b. Householder, householder’s spouse, or both participate in a defined contribution plan at work.
c. Includes householders who are widowed, divorced, separated, or never married.

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Table 3. Household Retirement Account Balances in 2004
Ratio of total
Total of all
retirement savings
Balance in all DC
retirement accounts
to annual
plans at current job
in householda
household earnings
Married householder
Age
Under 35
75th percentile
$30,000
$44,000
.515
50th percentile (median)
13,000
19,000
.267
25th percentile
4,700
5,400
.094
35 to 44
75th percentile
82,000
115,000
1.100
50th percentile (median)
35,000
47,600
.534
25th percentile
10,000
14,000
.179
45 to 54
75th percentile
186,000
275,000
2.24
50th percentile (median)
64,000
103,200
.897
25th percentile
20,000
30,000
.321
55 and older
75th percentile
192,000
373,000
4.830
50th percentile (median)
49,000
119,500
1.555
25th percentile
12,000
35,000
.535
Single householder
Age
Under 35
75th percentile
$12,000
$16,000
.324
50th percentile (median)
5,500
7,000
.153
25th percentile
2,000
2,500
.063
35 to 44
75th percentile
29,000
40,000
.858
50th percentile (median)
12,900
14,000
.366
25th percentile
3,900
5,000
.121
45 to 54
75th percentile
70,000
80,000
1.731
50th percentile (median)
24,000
32,000
.860
25th percentile
7,900
11,400
.232
55 and older
75th percentile
125,000
176,000
3.771
50th percentile (median)
25,000
65,000
1.406
25th percentile
9,000
13,000
.407
Source: Congressional Research Service analysis of the 2004 Survey of Consumer Finances.
a. Includes defined contribution plans from current and past jobs and individual retirement accounts (IRAs).
Only accounts with balances of $1 or more are included in the percentile rankings.

CRS-9
Amount of contributions. The amount that a household accumulates in a
DC plan depends on the amount that the employer and employee have contributed
to the plan and the investment gains or losses on those contributions. The maximum
permissible annual contributions by workers and employers are limited by federal
law, but few workers contribute the legal maximum.15 In 2004, the maximum
permissible employee contribution to defined contribution plans was the lesser of
100% of earnings or $13,000 per worker. Workers age 50 and older were permitted
to contribute an additional $3,000. The maximum total contribution, including both
employee and employer contributions, was $41,000 per worker in 2004.
Table 4 shows the annualized dollar amount of contributions to defined
contribution plans per household in 2004. Table 5 shows household contributions,
employer contributions, and total contributions as a percentage of household
earnings. In both tables, the first column of data shows the amount of household
contributions, the second shows the amount of employer contributions, and the third
column shows the total contribution to the plan. The employer and employee
contributions do not sum to the total contribution because in some cases only the
household contributed to the plan, and in other cases only the employer contributed.16
At each age, married-couple households contributed more to DC plans than
households headed by unmarried persons. Among both married-couple households
and single households and across all age groups, employee salary deferrals into
defined contribution plans were larger than employer contributions. (See Table 4.)
Among married-couple households headed by persons under 35, the median
household contribution in 2004 was $3,680, and the median employer contribution
was $2,520. The median total contribution was $5,520. Among households headed
by unmarried persons under 35, the median household contribution in 2004 was
$2,080, and the median employer contribution was $1,400. The median total
contribution was $3,120.
As a percentage of pay, the contributions of married-couple households and
households headed by unmarried individuals differed less than the dollar amounts of
their contributions. (See Table 5.) The median contribution among households
headed by individuals under age 45 was about 5% for both single and married
households. Both married-couple households and singles ages 45 to 54 typically
contributed about 6% of earnings. Overall, household contributions ranged from
about 3% of household earnings at the 25th percentile of contributions to about 10%
of household earnings at the 75th percentile of contributions.
15 The maximum annual deferral into a DC plan is subject to I.R.C. §402(g). As established
by P.L. 107-16, the maximum employee contribution under I.R.C. §402(g) is $15,500 in
2007 and is indexed in $500 increments. Workers age 50 and older can contribute an
additional $5,000. Under I.R.C. §415(c), the limit on total annual additions to defined
contribution plans — comprising the sum of employer and employee contributions — is
$45,000 in 2007. The §415(c) limit is indexed in $1,000 increments.
16 Unlike the calculation of a mean, when calculating percentiles, zero values are excluded.
Therefore, although the mean household contribution and mean employer contribution sum
to the mean total contribution, the median household contribution and median employer
contribution do not necessarily sum to the total median contribution.

CRS-10
Table 4. Contributions to Employer-sponsored Plans in 2004
(in 2004 dollars)
Household
Employer
Total
contribution
contribution
contribution
to DC plan
to DC plan
to DC plan
Married householder
Age
Under 35
75th percentile
$6,960
$4,080
$10,400
50th percentile (median)
3,680
2,520
5,520
25th percentile
1,800
1,350
3,120
35 to 44
75th percentile
8,800
5,500
13,160
50th percentile (median)
4,440
2,880
6,600
25th percentile
2,280
1,560
3,600
45 to 54
75th percentile
11,400
6,440
14,700
50th percentile (median)
6,000
3,120
8,760
25th percentile
2,880
1,600
4,440
55 and older
75th percentile
12,000
6,210
15,960
50th percentile (median)
5,400
3,000
7,860
25th percentile
2,280
1,320
3,640
Single householder
Age
Under 35
75th percentile
$3,960
$2,520
$5,640
50th percentile (median)
2,080
1,400
3,120
25th percentile
960
780
1,560
35 to 44
75th percentile
3,600
3,380
6,760
50th percentile (median)
2,340
1,900
3,600
25th percentile
1,200
960
2,080
45 to 54
75th percentile
5,400
3,800
8,400
50th percentile (median)
3,120
2,200
4,320
25th percentile
1,800
1,100
2,400
55 and older
75th percentile
9,240
3,600
12,000
50th percentile (median)
4,200
2,040
5,760
25th percentile
1,800
1,080
2,300
Note: Employer and employee contributions do not sum to the total because in some cases
only the household contributed to the plan, and in other cases only the employer contributed.
Source: Congressional Research Service analysis of the 2004 Survey of Consumer Finances.

CRS-11
Table 5. Contributions to Employer-sponsored Plans in 2004
(As a percentage of household earnings)
Household
Employer
Total
contribution
contribution
contribution
to DC plan
to DC plan
to DC plan
Married householder
Age
Under 35
75th percentile
9.3%
5.1%
13.8%
50th percentile (median)
5.1
3.1
8.1
25th percentile
2.9
2.0
4.8
35 to 44
75th percentile
8.3
6.0
12.2
50th percentile (median)
5.3
3.6
8.4
25th percentile
3.1
2.3
5.2
45 to 54
75th percentile
9.4
5.9
13.8
50th percentile (median)
6.2
3.7
9.1
25th percentile
4.0
2.4
6.1
55 and older
75th percentile
10.4
6.1
15.8
50th percentile (median)
6.7
4.0
10.2
25th percentile
3.8
2.3
6.0
Single householder
Age
Under 35
75th percentile
7.7%
5.1%
11.5%
50th percentile (median)
4.7
3.4
7.4
25th percentile
3.0
2.2
4.7
35 to 44
75th percentile
8.1
7.0
12.7
50th percentile (median)
5.5
4.9
9.7
25th percentile
4.0
2.4
5.9
45 to 54
75th percentile
10.1
7.3
14.9
50th percentile (median)
6.0
5.0
10.0
25th percentile
4.0
3.1
6.1
55 and older
75th percentile
13.1
7.5
19.8
50th percentile (median)
9.7
4.1
13.2
25th percentile
4.9
3.0
7.1
Note: Employer and employee contributions do not sum to the total because in some cases
only the household contributed to the plan, and in other cases only the employer contributed.
Source: Congressional Research Service analysis of the 2004 Survey of Consumer Finances.

CRS-12
How much might workers accumulate by Age 65?
In the previous section, we described the amounts that households had
accumulated in retirement savings accounts and how much they were contributing
to their retirement plans in 2004, as reported in the Federal Reserve Board’s Survey
of Consumer Finances. In this section, we use income data from the Census
Bureau’s Current Population Survey and statistical software that simulates the
variability of investment rates of return to estimate future retirement account balances
and to demonstrate how several variables can affect the amount of retirement savings
that households could accumulate by age 65.17
As was shown by the data displayed in Table 2, only 45% of working
households participated in employer-sponsored defined contribution plans in 2004.
Some households that did not participate in employer-sponsored plans saved for
retirement in individual retirement accounts (IRAs), but data from the SCF indicate
that most households that did not participate in an employer-sponsored plan also did
not own an IRA.18 Households that do not save for retirement may be reducing their
future incomes significantly, but by how much? If a household starts to save, what
variables might affect the amount that they have accumulated by the time the
householder reaches age 65? We address these questions in this section of the report.
As we noted in the introduction, workers must decide not only whether to save
for retirement, but also how much to save, how to invest their savings, and what to
do with their accumulated savings each time they change jobs and when they reach
retirement. A number of variables can affect the amount that households have
accumulated in their retirement accounts by the time they reach retirement age,
including:19
! household earnings;
! the amount that the household saves;
! the age at which the householder begins to save, and thus the
number of years over which contributions and investment earnings
accumulate; and
! the average annual rate of return earned by the household’s
retirement account.
17 We used the CPS rather than the SCF as the source of earnings because its much larger
sample size (more than 70,000 households) allowed us to estimate household earnings
among married-couple and unmarried householders by individual year of age rather than in
age groups. Our estimates of future retirement accumulations are based on annual
contributions as a percentage of earnings. Therefore, the SCF asset data were not needed.
18 According to the 2004 SCF, 38.8 million households had balances in DC plans in 2004,
32.6 million households owned an IRA, and 15.0 million had both a DC plan and an IRA.
Of 73.3 million U.S. households that did not own a DC plan from current or past
employment in 2004, only 17.6 million (24.0%) owned an IRA. ( CRS Report RL30922,
Retirement Savings and Household Wealth: Trends from 2001 to 2004 by Patrick Purcell)
19 Households may have wealth other than retirement accounts, including other financial
assets and/or a home that they own. This report focuses on retirement savings accounts.

CRS-13
Methods. To estimate household savings, we also had to estimate household
earnings. For the base year of our analysis, we estimated earnings in 2004 at every
age from 25 through 64 for married-couple and unmarried households at the 75th,
50th, and 25th percentiles of earnings from the March 2005 CPS. This produced an
age-earnings-marital status matrix with 240 cells. (See Appendix Table A-1.) For
each later year in the simulation, we increased earnings by 1.1%, which is the
estimated long-run growth rate of real wages as projected by the Office of the
Actuary of the Social Security Administration. For example, the median earnings in
2004 of a married-couple household headed by a 25 year-old was $41,000. To
estimate the same household’s earnings one year later when the householder would
be age 26, we multiplied the the 2004 median earnings of married-couple households
headed by a 26-year-old ($45,600) by 1.011, which resulted in estimated household
earnings of $46,102. The following year, when the householder would be age 27, we
estimated household earnings as $51,106, which is the 2004 earnings of a married-
couple household headed by a 27 year-old, ($50,000) multiplied by 1.0112. We
repeated the process for each household through age 64. For simplicity, we assumed
that married-couple households would remain married-couple households throughout
the period of the analysis and that unmarried households would remain unmarried.
Having estimated household earnings each year, we next had to choose the
percentage of earnings that each household would contribute to its retirement account
annually. The data on contribution rates from the 2004 Survey of Consumer
Finances indicated that most households contribute between 3% and 10% of earnings
to their employer-sponsored retirement plan. Based on these data, we estimated the
retirement savings that would accumulate by age 65, assuming that households
contributed either 6%, 8%, or 10% of household earnings to the account every year,
starting at age 25, age 35, or age 45.20 Assuming the householder retires at age 65,
these starting dates would result in periods of saving for retirement lasting 40 years,
30 years, and 20 years, respectively. Households that do not save every year would
accumulate less than we have estimated for those that contribute consistently.
To estimate the amount that households would have accumulated in their
retirement account by age 65, we had to estimate the annual rate of return on the
funds invested in those accounts. Rather than assume that the rate of return in each
year would be the long-term average rate of return on a mixed portfolio of stocks and
bonds, we used a Monte Carlo simulation process in which the rate of return in each
year was randomly selected from the range of likely rates of return implied by the
historical returns on stocks and bonds. Many financial advisors recommend that
investors shift their portfolios away from stocks and into bonds as they approach
retirement. Therefore, in our simulations, households allocated 65% of assets to the
Standard & Poor’s 500 index of stocks from the ages of 25 to 34, 60% to stocks from
35 to 44, 55% to stocks from 45 to 54, and 50% to stocks after age 55. In each case,
the remainder of the portfolio was assumed to be invested in AAA-rated corporate
bonds. The accounts were re-balanced after each year of the simulation so that the
portfolio would start the next year at the chosen allocation between stocks and bonds.
The model also takes into account the correlation between stock and bond returns.
20 The amounts represent the total annual contribution to the plan, as a percentage of
earnings. We do not differentiate between worker contributions and employer contributions.

CRS-14
What is “Monte Carlo” Analysis?
Monte Carlo analysis is a method of estimating the probable outcome of an
event in which one or more of the variables affecting the outcome are random. The
term was coined by mathematicians in the 1940s who likened probability analysis to
studying the games of chance played in the casinos of Monte Carlo. One common
use of Monte Carlo simulations is to illustrate how the variability of investment rates
of return can affect the amount that workers will accumulate in a retirement account.
The essence of a Monte Carlo estimation process is to simulate an event many times,
allowing the random variable to vary according to its mathematical mean and
variance, and then rank each outcome according to the likelihood of its occurrence.
Using Monte Carlo methods, we can estimate not just the result that will occur “on
average,” but also the likelihood of results that are significantly above or below the
average. In other words, Monte Carlo methods of estimation allow us to incorporate
into our estimates the element of risk.
Monte Carlo estimation methods utilize not just the average value of a random
variable, but also the distribution of values around the average. For example, rates
of return in the stock market vary from year to year. The nominal rate of return on
the Standard & Poor’s 500 index of stocks averaged 10.0% between 1926 and 2005,
but annual rates of return varied widely around this average, producing a standard
deviation of 19.7%. Likewise, while the nominal annual return on AAA-rated
corporate bonds averaged 6.3% between 1926 and 2005, the standard deviation
around this average was 7.1%. (Appendix Table A2 shows annual rates of return.)
To estimate the likely rate of return that an investment would achieve over a 40-
year period, for example, Monte Carlo simulation software generates a rate of return
for each year based on the distribution of probable rates of return, as derived from
historical data. The program then simulates the 40-year period a second time, again
generating a rate of return for each year from the probability distribution of rates of
return. The process is repeated until the simulation is completed, and thousands of
40-year investment periods have been simulated. The results of the simulation — in
this case, investment rates of return — are then ranked by percentiles.
In our simulation of a 40-year period in which 100% percent of assets were
invested in common stocks, the mean real rate of return in 5,000 iterations
(simulating a 40-year period 5,000 times) was 6.8%, which is the same as the actual
mean real rate of return on common stocks in the period from 1926 through 2005.
(1.10/1.03 = 1.068) However, in 5% of those 5,000 iterations, the mean real rate of
return over the 40-year period was 1.5% or less, while at the other extreme, in 5% of
the 5,000 iterations, the mean real rate of return over the 40-year period was 12.1%
or more. In terms of evaluating risk, these results imply an expected annual average
real rate of return on common stocks over any given 40-year period of 6.8%, and a
90% probability that the average annual real rate of return over that period will be
between 1.5% and 12.1%. With this information about the likely range of outcomes,
a household might choose to save more or less than they had been saving before,
depending on their tolerance for risk.

CRS-15
Simulation Results: Retirement Account Balances at Age 65
In Figures 1 through 4, we illustrate the likely range of retirement savings that
would be accumulated by married-couple households and unmarried householders
with high, medium, and low earnings, based on several different contribution rates,
lengths of investment period, and investment rates of return. We refer to households
with earnings at the 75th percentile for their age and marital status as “high earners,”
and to those with earnings at the 50th and 25th earnings percentiles as “median
earners” and “low earners,” respectively.
Variability of investment rates of return. Figure 1 illustrates how the
variability of investment rates of return can affect the amount of retirement assets that
households accumulate. In this example, we estimated the value of a retirement
account balance at age 65 for a married-couple household with median earnings that,
beginning at age 35, contributed 8% of earnings each year for 30 years to an account
that was invested in a mix of stocks and bonds. Each of the 1,000 simulations of a
30-year investment period produced a unique mean rate of return for the 30-year
period. Of these, the median real rate of return over the 30-year period was 5.5% At
this rate of return, the household’s retirement account balance (in 2004 dollars)
would be $468,000 when the householder reached age 65.
Figure 1. Effect of variability in investment rates of return on retirement savings
at age 65
$1,100,000
$961,000
$1,000,000
$900,000
$800,000
dollars
004
$700,000
, in 2
$600,000
s
g
$468,000
in
v
$500,000
a
t s
$400,000
men
re
$300,000
ti
$214,000
Re
$200,000
$100,000
$0
5th percentile of returns
50th percentile of returns
95th percentile of returns
Investment rate of return (percentile rank)
Note: Retirement savings at age 65 of a married-couple household with median earnings that contributes
8% of pay annually for 30 years beginning at age 35, by investment rate of return.
Source: Congressional Research Service.

CRS-16
Figure 1 also shows what this household would accumulate in its retirement
account if the average rate of return over the 30-year investment period was
significantly higher than average or lower than average. Based on the history of
stock and bond returns from 1926 through 2005, and given the allocation of
investment assets that we chose, there is a 5% chance that the household’s retirement
account would earn an average annual real rate of return of 1.7% or less over the 30-
year investment period. The historical record of returns suggests that such a low rate
of return has approximately a one-in-twenty chance of occurring in any given 30-year
period. In the event that investment returns were at the 5th percentile, the household
would have $214,000 (in 2004 dollars) in its retirement account when the
householder reached age 65. This is less than half of the amount that it would have
accumulated if the average rate of return over the 30-year period were equal to the
median real rate of return of 5.5%.
On the other hand, stock and bond markets might perform better-than-average
over the period when the household is saving for retirement, in which case it will
accumulate more assets than it would have in a period of average investment returns.
Based on historical returns, in any 30-year investment period, there is a 95%
probability that the average real rate of return on the mix of assets in the household’s
retirement account would be 9.3% or less. However, there is a 5% chance that
average real rate of return would be higher than 9.3%. If the household were to attain
a 9.3% average real rate of return on its investments over 30 years, it would have a
retirement account balance of $961,000 (in 2004 dollars) at age 65. The amounts
displayed in Figure 1 illustrate that variability in rates of return will inevitably lead
to some uncertainty in retirement planning. Households can decide when to begin
saving for retirement and how much to save, but variability in rates of return is
beyond their control and yet has a great impact on their assets at retirement.
Length of investment period. The age at which a worker starts saving for
retirement can dramatically affect the amount that he or she has accumulated at
retirement age. Beginning to save at a younger age results in larger total
contributions and allows investment gains to compound over a longer time. Figure
2 shows the retirement account balance at age 65 of a married-couple with median
household earnings that contributes 8% of pay each year to a retirement account
invested in a mix of stocks and bonds over periods of 20, 30, and 40 years. The
household that begins saving at age 25 saves for 40 years, while the households that
begin saving at ages 35 and 45 save for 30 years and 20 years, respectively. For each
of the three investment periods, we show the account balance at age 65 if the average
rate of return for the investment period were equal to the median rate of return, and
if the average rate of return were significantly below the median (at the 5th percentile
of likely rates of return) or significantly above the median (at the 95th percentile of
likely rates of return).
If the couple were to begin saving at age 25 and earned the median rate of return
over 40 years, their account balance at age 65 would be $844,000 (in 2004 dollars).
Delaying the start of retirement saving until age 35 would result in an account
balance of $468,000, or just 55% of the amount they would have accumulated had
they started saving at age 25. Waiting until age 45 to begin saving for retirement
would result in an account balance of $213,000 at 65, or one-fourth of the amount
they would have had at 65 if they had contributed 8% a year starting at age 25.

CRS-17
Of course, a couple that delays the start of saving until age 45 might get lucky
and invest during a period of above-average rates of return. For example, if rates of
return during the twenty years when they were saving were in the 95th percentile of
the likely rates of return, the couple would accumulate $372,000 (in 2004 dollars) by
age 65, or about 75% more than if rates of return during that period were at the 50th
percentile. On the other hand, even a couple that begins to save at age 25 may have
the misfortune to invest during a period of below-average returns. A couple with
median household earnings that contributes an amount equal to 8% of earnings
annually for 40 years to a retirement account that is invested in a mix of stocks and
bonds could expect to accumulate $844,000 (in 2004 dollars) by age 65 if investment
returns over that period were in the 50th percentile of likely returns, but they would
have just $370,000 if investment returns were at the 5th percentile of likely rates of
return. Workers cannot control the variability of investment rates of return, but they
can choose to begin saving while they are young. As the data presented in Figure 2
demonstrate, this usually will lead to much greater wealth at retirement than they
could achieve if they were to wait until 35 or 45 to begin saving.
Figure 2. Effect of age at which saving begins on retirement savings at age 65
$2,200,000
$2,025,000
$2,000,000
$1,800,000
rs
a
ll $1,600,000
4 do $1,400,000
200
n $1,200,000
s, i
$961,000
$1,000,000
ving
$844,000
sa
$800,000
nt
e
$372,000
$600,000
irem
$468,000
$213,000
$370,000
Ret
$400,000
$214,000
$119,000
$200,000
$0
45 (20 years of saving)
35 (30 years of saving)
25 (40 years of saving)
Age at which household begins saving
5th percentile of returns
50th percentile of returns
95th percentile of returns
Note: Retirement savings at age 65 of a married-couple household with median earnings that contributes 8%
of earnings annually beginning at age 35, by age at which saving begins and investment rate of return
Source: Congressional Research Service.

CRS-18
Contribution rates. Figure 3 illustrates the effect of contribution rates on
retirement savings. A married-couple household that contributed 6% of household
earnings each year to a retirement account invested in a mix of stocks and bonds
starting at age 35 would accumulate $353,000 (in 2004 dollars) by age 65 if the real
rate of return over that period were at the 50th percentile of likely rates of return. By
contributing 8% of earnings, the household would have $468,000 by age 65, or 33%
more than if they had contributed 6% of pay to their account. Had the couple
contributed 10% per year for 30 years, their account balance at age 65 would be
$594,000, or 68% higher than the amount resulting from a 6% annual contribution.
Variation in rates of return can affect retirement accumulations significantly,
even for those who contribute a greater amount to their retirement account. For
example, the results displayed in Figure 3 show that if the average real rate of return
over 30 years were in the 5th percentile of likely rates of return, a couple that
contributed 6% of pay annually to a retirement account invested in a mix of stocks
and bonds could expect to have accumulated just $170,000 (in 2004 dollars) by age
65. This is less than a quarter of the amount that they would have accumulated if
rates of return during that period had been at the 95th percentile. Similarly, with
returns at the 5th percentile, a couple contributing 10% of earnings annually will have
accumulated $301,000 by age 65, or about half of what they would have accumulated
at the median rate of return, and only a quarter of the $1.2 million that would have
accumulated if rates of return were at the 95th percentile of likely rates of return.
Figure 3. Effect of annual contribution rate on retirement savings at age 65
$1,400,000
$1,219,000
$1,200,000
llars
$961,000
o $1,000,000
04 d
$762,000
$800,000
s, in 20
$594,000
ving
$600,000
sa
$468,000
$353,000
ment
$400,000
ire
$301,000
Ret
$214,000
$170,000
$200,000
$0
6%
8%
10%
Total annual contribution as a percentage of household earnings
5th percentile of returns
50th percentile of returns
95th percentile of returns
Note: Retirement savings at age 65 of a married-couple household with median earnings that contributes
for 30 years beginning at age 35, by annual contribution and investment rate of return.
Source: Congressional Research Service.

CRS-19
Household earnings. Figure 4 shows account balances at age 65 (in 2004
dollars) for married couples at three different earnings levels, assuming that they
contributed 8% of earnings each year beginning at age 35 to a retirement account
invested in a mix of stocks and bonds. A married-couple household with median
earnings would have accumulated $468,000 (in 2004 dollars) by age 65 if stock and
bond market returns were at the median during the 30-year investment period. A
high-earning household with earnings at the 75th percentile would have accumulated
$706,000 dollars, while a low-earning household with earnings at the 25th percentile
would have accumulated just $289,000.
Figure 4. Effect of household earnings on retirement savings at age 65
$1,600,000
$1,440,000
$1,400,000
llars $1,200,000
o
04 d
$961,000
$1,000,000
s, in 20
$800,000
$706,000
aving
$598,000
s
$600,000
$468,000
ment
$289,000
$327,000
ire
$400,000
Ret
$214,000
$130,000
$200,000
$0
25th percentile
50th percentile
75th percentile
Annual household earnings, by percentile
5th percentile of returns
50th percentile of returns
95th percentile of returns
Note: Retirement savings at age 65 of a married-couple household that contributes 8% of household earnings
for 30 years beginning at age 35, by annual household earnings and investment rate of return.
Source: Congressional Research Service.

CRS-20
Simulation Results: Measuring retirement income adequacy
For most people, the main purpose of saving for retirement is to have money
available to replace the earnings that they will lose when they stop working. The
proverbial “three-legged stool” of retirement income — private pensions, Social
Security, and personal savings — is missing a leg for many households because the
number of defined benefit pensions has declined substantially over the past 25 years.
Most workers in the U.S. — about 96% — are covered by Social Security, but Social
Security is not designed to replace all of a worker’s earnings.21 The Social Security
Administration estimates that for a career-long average-wage earner retiring at the
full retirement age, Social Security will replace about 41% of their career-average
earnings. For a career-long low-wage earner, Social Security will replace an
estimated 55% of average earnings. For a career-long high-wage earner, Social
Security will replace just 27% of their average earnings.
The percentage of pre-retirement earnings that is replaced by Social Security,
pensions, or other income is called the earnings replacement rate. The estimated
value of retirement accounts at age 65 in constant 2004 dollars is an absolute
measure of retirement assets. The earnings replacement rate is a relative measure of
retirement assets. To calculate earnings replacement rates, we first needed to decide
on an appropriate measure of earnings. For most households, a relevant measure
would be their average earnings in the years just before they reach retirement age.
As our measure of pre-retirement earnings, we used average household earnings of
married-couple and single-person households headed by persons 60 to 64 years old.
We used average earnings in 2004 as reported on the CPS for households headed by
persons 60 to 64 years old as the base measure of earnings, and projected these
amounts forward at a growth rate of 1.1 percent per year.
To calculate the earnings replacement rate from households’ retirement savings,
we converted the account balance into a stream of income. We did this by
calculating the annuity value of the retirement account. An annuity is a contract
between an individual and a financial institution — usually an insurance company
— in which, in exchange for a premium paid by the annuity purchaser, the insurer
promises to pay the individual an income for life or for a fixed period of years. The
premium for an “immediate income” annuity is usually a single payment, which the
insurer then invests. A life annuity insures the purchaser (and his or her surviving
spouse in the case of a joint and survivor annuity) against longevity risk, which is the
risk that the individual will outlive his or her retirement assets. We calculated the
percentage of pre-retirement earnings that would be replaced if the household’s entire
retirement account balance were converted to a life annuity.22 For example, if a
21 Most workers not covered by Social Security are employees of state and local
governments that have elected not to participate. These governments are required to provide
them with pensions. About one-fourth of state and local workers are not in Social Security.
22 We defined pre-retirement earnings as average household earnings in the five years before
the householder reached age 65. For most households, earnings peak when the householder
is between 50 and 60 years old. Also, the annuity values are based on converting the entire
account balance to an annuity, and thus illustrate the maximum replacement rate that could
(continued...)

CRS-21
married-couple household with median earnings contributed an amount equal to 8%
of earnings to a retirement account each year for 30 years and earned the median rate
of return over that period of time, the couple would have accumulated $468,000 (in
2004 dollars) when the householder reached age 65. In January 2007, this amount
would purchase a joint and 100% survivor annuity that would replace 42% of the
household’s average annual earnings in the five years before the householder reached
age 65.23 (On the CPS, income is reported before taxes. The replacement rate here
is pre-tax annuity income divided by pre-tax earnings.)
22 (...continued)
be achieved from converting the household’s retirement account to an annuity.
23 The annuity values were calculated on [http://www.immediateannuities.com]. For
married couples, they represent the income from a level, joint and 100% survivor annuity
for a couple in which the husband is age 65 and the wife is age 62. For unmarried
households, they represent the income from a level, single-life annuity for a male
householder who is 65 years old. An annuity purchased by a woman age 65 with the same
account balance would provide a smaller annual income because women have longer life
expectancies than men.

CRS-22
Annuities: Insurance against longevity risk
Workers who reach retirement age with the bulk of their retirement wealth in
a retirement account face the risk that if they withdraw money too quickly, they may
outlive their assets. Income annuities provide protection against this risk by pooling
the mortality risk of everyone who purchases an annuity. Some annuity purchasers
will die before reaching their normal life expectancy, which offsets the costs to the
insurer of paying income to those who live longer than their normal life expectancy.
Despite offering a guaranteed income, no matter how long the purchaser and his or
her insured spouse may live, the market for income annuities in the United States
remains relatively small.
Why aren’t income annuities more popular? One reason for the slow growth of
the annuity market is that purchasing an annuity is not without risks. First, annuities
tend to be purchased by people who, because of good health and family history,
expect to live longer than average. Because annuity purchasers tend to have longer-
than-average life expectancy, insurers must charge premiums that are higher than
they would be if annuity purchasers were a random cross-section of the population.
Because annuities are priced according to the longer life-expectancy of people who
actually buy them, a person with average life expectancy may find that an annuity is
not a good deal. Second, the annuity purchaser could die earlier than he or she
expects, in which case the annuity premium will, in essence, have been forfeited to
the insurer. There are many types of annuities that reduce this risk, such as joint and
survivor annuities and term-certain annuities, but each of these guarantees reduces
the income that the annuity pays during the life of the purchaser.
Most annuities offer only limited protection against inflation. A level annuity
pays a fixed monthly amount for life. The real value of the annuity declines over time
as prices rise. Some annuities offer partial inflation protection. Graded annuities
increase the monthly payment by a fixed percentage — typically 3% — each year, but
they pay a smaller initial amount and also lose value if inflation exceeds the
guaranteed percentage increase in the annuity. Some insurers now offer inflation-
indexed annuities, but they are very expensive and few have been sold. Another risk
in buying an annuity is that giving up a substantial proportion of one’s retirement
assets to an insurer could leave a household with inadequate resources to pay for any
large expenses that may arise, such as medical costs or long-term care expenses.
Benefits from life annuities could help assure that people who have most of their
retirement wealth in a retirement account do not exhaust their assets before they die
and spend their later years in or near poverty, but inducing more people to purchase
income annuities remains a challenge for many insurers.

CRS-23
Measuring earnings replacement rates. Figures 1 through 4 illustrate
how variation in rates of return, length of investment period, contribution rates, and
household income can affect the amount of retirement savings that households have
accumulated by age 65. Figure 5 combines in a single graph the effect that variation
in investment rate of return, length of investment period, and contribution rates can
have on earnings replacement rates for a married-couple household with median
household earnings. In this graph, the value of the household’s retirement account
at age 65 (measured in 2004 dollars) has been converted to a joint and 100% survivor
annuity, and the income from the annuity is compared to average household earnings
over the five years before retirement.
On the vertical axis, the graph shows the annuity value of the household’s
retirement account, measured as the percentage of average pre-retirement earnings
the annuity would replace. On the horizontal axis, we show three investment periods
of 20, 30, and 40 years, which correspond in our analysis to saving for retirement
starting at ages 45, 35, and 25, respectively. The vertical bars show the range of
replacement rates that could be achieved from converting the household’s retirement
account to a joint and 100% survivor annuity at age 65, depending on the percentage
of pay that the household contributed to its account each year and the investment rate
of return. On each bar, the replacement rates corresponding to low, average, and high
rates of return are represented by the square, circle, and diamond, respectively. For
example, the left-most (and shortest) vertical bar in Figure 5 shows that if a married
couple with median earnings invested 6% of household earnings for 20 years, their
retirement account balance at age 65 could purchase an annuity that would pay an
amount equal to just 8% of their final average pay, assuming that investment returns
over the 20-year period were in the 5th percentile of likely returns. The annuity value
of their account would replace 14% of their final average earnings if investment
returns were at the median, and the annuity would replace 27% of their final average
pay if investment returns over the 20-year period were in the 95th percentile of likely
returns.
Moving from left to right across Figure 5, the vertical bars representing
earnings replacement rates both begin and end at higher replacement rates,
representing the effects on retirement savings of higher contribution rates and longer
investment periods. The greater length of the bars as contribution rates rise and
investment periods grow longer illustrates the impact that variability of rates of return
can have on retirement account accumulations, and in turn on the annuity income that
one could purchase with those accounts. Looking at the left-most panel, we see that
if a household were to begin saving 8% of earnings at age 45, the annuity value of its
retirement account could vary by more than 20 percentage points, depending on
whether the real rate of return in the period is significantly above average (at the 95th
percentile of returns) or significantly below average (at the 5th percentile of returns.)
After a 20-year period of high investment returns, a median-earning couple saving
8% of earnings per year would have a retirement account balance that, if converted
to an annuity, could replace 33% of its average pre-retirement earnings. If
investment returns during that period are significantly below average, however, the
annuity value of their retirement account would replace just 11% of the couple’s pre-
retirement average earnings.

CRS-24
The longer the investment period, the greater the difference in retirement
accumulations that results from the variability of returns. After a 40-year period of
high investment returns (at the 95th percentile of likely returns), a median-earning
couple saving 8% of earnings per year would have a retirement account balance that,
if converted to an annuity, could replace 180% of its average pre-retirement
household earnings. In other words, if they converted their entire retirement account
to an annuity, the income would be almost twice their average household earnings
in the five years preceding retirement. If investment returns during that period were
significantly below average (at the 5th percentile of likely returns), the annuity value
of their retirement account would replace only about one-third of the couple’s pre-
retirement average earnings.
The account balance that a household would accumulate over 40 years of
investing during a period of below-average returns would be much less than the
amount that the couple would have accumulated if they’d had the good fortune to
have invested during a period of above-average rates of return. Nevertheless, in our
simulations the annuity value of an account accumulated by contributing 8% of
earnings over 40 years of very low investment returns was almost the same as the
annuity value of an account accumulated by contributing 8% of earnings over a 20-
year period of well above-average investment returns. Workers who begin to save
at a young age can accumulate substantial retirement assets even in periods of low
returns, and they will be far better off at retirement than those who delay saving in
the event that investment returns are at or above the historical average.

CRS-25
Figure 5. Estimated range of earnings replacement rates at age 65 for a married-
couple household with median earnings
Annual contribution, as a percentage of pay:
220%
10%
210%
200%
190%
8%
180%
170%
160%
150%
140%
t rate
6%
Annual contribution, as a
130%
en
percentage of pay:
120%
cem
10%
la 110%
rep 100%
s
g
8%
90%
rnin
80%
Ea
6%
70%
Annual contribution, as a
percentage of pay:
60%
10%
50%
8%
40%
6%
30%
20%
10%
0%
20 years
30 years
40 years
Number of years of saving
Rate of return (percentile rank):
5th pctl.
50th pctl.
95th pctl.
Source: Congressional Research Service.

CRS-26
Married couples versus singles. The data presented in Figures 1 through
5 illustrate account balances for married-couple households at age 65 under specific
assumptions about the age at which savings begin, annual contribution rates,
investment rates of return, and household earnings. Figure 6 compares the
accumulated retirement savings at age 65 (in 2004 dollars) of married-couple
households and unmarried householders with median earnings who contribute 8% of
earnings beginning at age 35 to a retirement account invested in a mix of stocks and
bonds. Account balances are higher for married couples because their higher
earnings produce larger contributions, but as the data presented in Figure 7
demonstrate, if the couple purchases a joint and 100% survivor annuity, their
earnings replacement rate would be lower than that of an unmarried householder
purchasing a single-life annuity.24
If, over a 30-year investment period, total rates of return on stocks and bonds
were at their historical median, a married-couple with median earnings that
contributed 8% of pay annually to a retirement plan invested in a mix of stocks and
bonds could accumulate an estimated $468,000 (in 2004 dollars) by age 65. This is
almost twice as much as the estimated $247,000 that would be accumulated by an
unmarried householder with median earnings contributing 8% of pay to a retirement
account over the same period. Nevertheless, the annuity value of the retirement
account, expressed as a percentage of pre-retirement earnings, would be higher for
the unmarried householder than for the married-couple household. (See Figure 7.)
The higher earnings replacement rate for the unmarried householders is due largely
to the fact that in these examples, the annuity estimates are based on a joint and
100% survivor annuity for the married-couple household and a single-life annuity for
the unmarried householder. If the married-couple household elected to purchase an
annuity without a survivor benefit (i.e., a single-life annuity based on the age of the
householder), their annuity income would be higher during the life of the annuity
purchasers, but the surviving spouse would no longer receive annuity income after
the death of the annuity purchaser.
24 Married-couple households have higher earnings than unmarried households mainly
because they are more likely to have multiple earners.

CRS-27
Figure 6. Estimated retirement savings at age 65 of married couple and
unmarried householders
$1,100,000
$961,000
$1,000,000
$900,000
llars
o
$800,000
d
04
$700,000
$600,000
s, in 20
g
$468,000
$507,000
$500,000
avin
t s
$400,000
men
$247,000
$300,000
tire
$214,000
Re
$200,000
$113,000
$100,000
$0
Married
Single
Marital status of householder
5th percentile of returns
50th percentile of returns
95th percentile of returns
Note: Retirement savings at age 65 of married couples and singles with median household earnings who contribute
8% of household earnings for 30 years, by investment rate of return.
Source: Congressional Research Service.

CRS-28
Figure 7. Earnings replacement rates at age 65 of married couples and
unmarried householders
1.20
1.02
1.00
e
0.85
t rat 0.80
en
cem
la 0.60
0.50
rep
s
g
0.42
in 0.40
rn
a
E
0.23
0.19
0.20
0.00
Married
Single
Marital status of householder
5th percentile of returns
50th percentile of returns
95th percentile of returns
Note: Earnings replacement rate at age 65 of married couples and singles with median household earnings
who contribute 8% of household earnings for 30 years, by investment rate of return.
Source: Congressional Research Service.
Detailed simulation results. Table 6 displays the estimated retirement
account balances (in 2004 dollars) at age 65 for households that contribute an amount
equal to 8% of household earnings to a retirement account for periods of 40 years
(beginning at age 25), 30 years (beginning at age 35), and 20 years (beginning at age
45). Retirement account accumulations are shown both for married-couple
households and unmarried householders with high, median, and low career-average
earnings. These earnings levels are represented by households with earnings at the
75th percentile, 50th percentile, and 25th percentile among households of the same age
and marital status. Similar tables showing retirement account balances resulting from
contributions equal to 6% of earnings and 10% of earnings are shown in the appendix
to this report. (See Table A3 and Table A4.)
For each of six types of household, as defined by household earnings and the
marital status of the householder, Table 6 shows the estimated retirement account
balance at age 65 resulting from annual contributions equal to 8% of pay over periods
of 20, 30, and 40 years, depending upon whether the average real rate of return on
investment during that period was at the 95th, 50th, or 5th percentile of likely returns.
For example, a median-earning married-couple household that began contributing 8%
of pay annually at age 35 to a retirement account invested in a mix of stocks and
bonds could expect, on average, to have accumulated $468,000 (in 2004 dollars) in

CRS-29
its retirement account by age 65. This is the amount that would result if investment
returns over those 40 years fell in the middle — the 50th percentile — of the likely
range of possible returns, based on the distribution of real rates of total return on
stocks and bonds that occurred between 1926 and 2005. If rates of return over the
investment period were well above average — at the 95th percentile of likely returns
— the household’s estimated retirement account balance at age 65 would be
$961,000 (in 2004 dollars). On the other hand, if the average rate of return earned
over the investment period was well below average — at the 5th percentile of likely
rates of return — the household would have accumulated just $214,000 (in 2004
dollars) by age 65.
Table 6 also displays two relative measures of retirement savings: the ratio of
the account balance to the household’s average earnings in the five years before the
householder reached age 65 and the annuity value of the retirement account balance
at age 65. For example, the estimated retirement account balance at age 65 of
$468,000 (in 2004 dollars) for a median-earning married-couple household that
contributed 8% of pay annually to a retirement account over 40 years beginning at
age 25 would be equal to 7.0 times the household’s average earnings (in 2004
dollars) during the five years when the householder was ages 60 to 64. Based on
current interest rates, if this amount were converted to a level, joint and 100%
survivor annuity, it would replace an estimated 42% of the household’s average
earnings in the five years that the householder was ages 60 to 64. In our simulations,
given an annual retirement plan contribution equal to 8% of earnings, the ratio of
account balances at age 65 to household earnings from ages 60 to 64 ranged from a
low of 1.8 times earnings for low-earning married-couple and unmarried households
that begin to save at age 45 and invest during a period of low investment returns to
a high of 31times earnings for a high-earning unmarried householder who begins
saving at age 25 and invests during a period of high investment returns. Replacement
rates ranged from a low of 10% for low-earning married-couple households and 12%
for low-earning unmarried households who invest in a period of below-average
returns to 202% for high-earning married-couple households and 257% for high-
earning unmarried households who invest in a period of above-average returns.

CRS-30
Table 6. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 8% of Household Earnings
(Amounts in 2004 dollars)
Married householder
Unmarried householder
Annual household earnings
Annual household earnings
75th
50th
25th
75th
50th
25th
percentile
percentile
percentile
percentile
percentile
percentile
Household begins saving at age 25 (40 years of saving)
95th percentile of returns
Account balance
2,997,000
2,025,000
1,267,000
1,880,000
1,184,000
698,000
Savings/Final 5 avg. pay
23.5
27.1
30.4
26.8
28.7
31.0
Earnings replacement rate
1.56
1.80
2.02
2.22
2.38
2.57
50th percentile of returns
Account balance
1,259,000
844,000
526,000
772,000
484,000
285,000
Savings/Final 5 avg. pay
9.9
11.3
12.6
11.0
11.8
12.7
Earnings replacement rate
0.66
0.75
0.84
0.91
0.98
1.05
5th percentile of returns
Account balance
555,000
370,000
228,000
333,000
208,000
122,000
Savings/Final 5 avg. pay
4.4
4.9
5.5
4.7
5.1
5.4
Earnings replacement rate
0.29
0.33
0.36
0.39
0.34
0.45
Household begins saving at age 35 (30 years of saving)
95th percentile of returns
Account balance
1,440,000
961,000
598,000
813,000
507,000
297,000
Savings/Final 5 avg. pay
12.6
14.3
15.9
12.9
13.7
14.7
Earnings replacement rate
0.75
0.85
0.95
0.96
1.02
1.09
50th percentile of returns
Account balance
706,000
468,000
289,000
397,000
247,000
145,000
Savings/Final 5 avg. pay
6.2
7.0
7.7
6.3
6.7
7.1
Earnings replacement rate
0.37
0.42
0.46
0.47
0.50
0.53
5th percentile of returns
Account balance
327,000
214,000
130,000
182,000
113,000
66,000
Savings/Final 5 avg. pay
2.9
3.2
3.5
2.9
3.0
3.2
Earnings replacement rate
0.17
0.19
0.21
0.22
0.23
0.24
Household begins saving at age 45 (20 years of saving)
95th percentile of returns
Account balance
565,000
372,000
224,000
310,000
194,000
113,000
Savings/Final 5 avg. pay
5.5
6.2
6.6
5.5
5.8
6.2
Earnings replacement rate
0.29
0.33
0.36
0.37
0.39
0.42
50th percentile of returns
Account balance
326,000
213,000
128,000
179,000
111,000
65,000
Savings/Final 5 avg. pay
3.2
3.5
3.8
3.2
3.3
3.6
Earnings replacement rate
0.17
0.19
0.20
0.21
0.22
0.24
5th percentile of returns
Account balance
185,000
119,000
70,000
101,000
62,000
36,000
Savings/Final 5 avg. pay
1.8
2.0
2.1
1.8
1.9
2.0
Earnings replacement rate
0.10
0.11
0.11
0.12
0.13
0.13
Source: Congressional Research Service.

CRS-31
Policy considerations
The uncertain future of Social Security and the declining prevalence of defined-
benefit pensions that provide a guaranteed lifelong income have put much of the
responsibility for preparing for retirement directly on workers. Saving for retirement
will be especially important for workers who are not included in a defined-benefit
pension where they are employed, which includes about 80% of all workers in the
private sector. Even among those who are saving for retirement, retirement account
balances are generally low when compared to household earnings. As the data
displayed in Table 3 showed, the median account balance in 2004 among married-
couple households headed by persons 55 to 64 years old was equal to just 1.6 times
the median earnings of those households. Among unmarried householders between
the ages of 55 and 64, median retirement savings were equal to just 1.4 times median
earnings.
The low rate of personal saving in the United States and the lack of any
retirement savings accounts among millions of American households indicate that
there is a need for greater awareness among the public about the importance of
setting aside funds to prepare for life after they have stopped working. Most workers
in the United States will need to begin saving more of their income if they wish to
maintain a standard of living in retirement comparable to that which they enjoyed
while working. The alternatives would be to work longer or to greatly reduce their
standard of living in retirement.
Employers in the United States are not required to offer pensions to their
employees and workers are not required to save for retirement. Because both of these
activities are voluntary, most policy proposals for boosting workers’ retirement
saving are intended to make workers more aware of the importance of saving and to
make the act of saving easier for both workers and employers. Although most
defined contribution plans continue to require employees to elect to participate, a
growing number of plans have adopted automatic enrollment of eligible workers, and
the Pension Protection Act of 2006 (P.L. 109-280) included provisions intended to
encourage more employers to adopt automatic enrollment in their retirement plans.25
Another option to boost retirement saving would be to promote greater use of payroll
deduction for individual retirement accounts (IRAs). Because IRAs are not employer-
sponsored plans, there would be little administrative burden for employers, and
payroll deduction would be an easy way for workers to send money directly to a
retirement account.26
The Pension Protection Act also made permanent the Retirement Savings Tax
Credit, originally enacted in 2001, and provided for indexing the income thresholds
over which the credit is phased out. Some policy analysts have suggested that if this
25 See CRS Report RS21954, Automatic Enrollment in 401(k) Plans. The PPA also allows
taxpayers to instruct the IRS to direct a portion of their income tax refund into an IRA.
26 See “Pursuing Universal Retirement Security Through Automatic IRAs,” joint written
statement of David C. John and J. Mark Iwry, testimony before Subcommittee on
Long-Term Growth and Debt Reduction, Committee on Finance, United States Senate, June
29, 2006. [http://www.senate.gov/~finance/hearings/testimony/2005test/062906testdjmi.pdf]

CRS-32
credit were made refundable, it would encourage more lower-income workers to save
for retirement.27 Another proposal would disregard amounts in retirement savings
plans for purposes of determining eligibility for certain means-tested federal aid
programs. Both of these proposals were included in S. 2431 (Baucus) of the 109th
Congress. On the employer side, it has been proposed to give employers a tax credit
for the cost of maintaining retirement savings plans to encourage more employers to
offer such plans. S. 2431 of the 109th Congress included such a credit.
With respect to promoting secure lifetime income for retirees, policy proposals
have focused on providing incentives for people to purchase life annuities. For
example, under one proposal, individuals would not pay federal taxes on one-half
of the income generated by annuities that promise lifetime payments. There would
be an annual limit of $20,000 on the amount of annuity income that an individual
could exclude from federal taxes each year.28 Another policy option would be to
require employers that offer defined contribution plans to offer retiring workers the
opportunity to purchase an annuity through the employer, as is currently required of
defined benefit plans.
Conclusion
Are Americans saving adequately for retirement? There is no simple answer to
this question because circumstances vary so greatly from one household to another.
Data from the Federal Reserve Board’s Survey of Consumer Finances indicate that
fewer than half of all working households participated in an employer-sponsored
retirement savings plan in 2004, and fewer than a third of all working households
owned an individual retirement account. For this report, we estimated the amounts
that married-couple households and unmarried householders with high, medium, and
low earnings could accumulate in their retirement accounts by age 65, depending on
the percentage of earnings that they save, the age at which they begin saving, and the
total real rate of return in stock and bond markets during the period that they are
investing. Two of these three variables — the contribution rate and the age at which
they begin to save — are more or less under the control of the worker.
As the results displayed in Figure 5 illustrate, starting to save while young and
doing so consistently every year is perhaps the single most effective way to assure
that one reaches retirement with adequate savings. For a household with median
annual earnings, even a relatively low annual contribution equal to 6% percent of
earnings will, at the median likely rate of return, grow over 40 years to an amount
that, if converted to an annuity, would replace more than half of the household’s
average pre-retirement earnings. At a 10% percent contribution rate, the annuity
value of the account would replace more than 90% of the household’s pre-retirement
earnings, assuming rates of return are at the median. It is also important to note that
our estimates are based on the assumption that the household contributes to a
retirement plan every year for a period of 20, 30, or 40 years. Because of
27 See CRS Report RS21795, The Retirement Savings Tax Credit: A Fact Sheet by Patrick
Purcell.
28 This proposal was included in H.R. 819/S. 381, “The Retirement Security for Life Act of
2005” of the 109th Congress.

CRS-33
interruptions in employment, unexpected expenses, and other reasons, many
households do not contribute to a retirement plan every year.
Unfortunately, we cannot safely assume that rates of return over the next 20, 30,
or 40 years will be “average.” In our analysis, we simulated the variability in rates
of return through a Monte Carlo process. We found that, although the average annual
rate of total return over 30 years on the mixed portfolio of stocks and bonds that we
chose for our analysis would be 5.5%, there was a 5% chance that the real rate of
return would be 1.7% or lower and a 5% chance that it would be 9.3% or higher.
This variability in rates of return is something over which workers have no control,
and which will inevitably lead to some uncertainty in retirement planning. While it
may be easier for workers to focus on what they are likely to accumulate in their
retirement accounts “on average,” ignoring the variability of investment rates of
return could lead to poor decisions that might be avoided if workers were better
informed about the way that variability in investment rates of return can affect their
retirement savings over time. A worker who is told that the most likely real rate of
return on his or her investments is 5.5% might save more or less than if he or she
were told that the most likely real rate of return will be between 1.7% and 9.3%.
Both statements are true, but the second more clearly conveys the uncertainty that
characterizes any estimate of likely future rates of return on investment.

CRS-34
Appendix
Table A1. Household Earnings in 2004, by Age and Marital
Status of Householder and Percentile Rank of Earnings
Married Householder
Unmarried Householder
Age
75th
50th
25th
75th
50th
25th
percentile
percentile
percentile
percentile
percentile
percentile
25
$60,500
$41,000
$27,271
$52,000
$33,000
$19,200
26
63,400
45,600
30,000
52,784
35,000
20,000
27
73,000
50,000
32,000
56,000
35,000
20,000
28
75,600
54,000
34,150
55,100
36,000
20,000
29
78,000
52,000
34,000
55,000
35,000
22,900
30
82,000
58,200
37,500
55,000
35,000
22,000
31
86,000
55,000
34,000
55,000
34,000
20,000
32
87,000
59,500
35,000
54,000
35,000
20,000
33
90,000
60,000
37,000
54,000
32,000
20,000
34
90,000
60,800
38,000
55,000
35,000
21,000
35
95,000
63,500
42,000
55,000
35,000
20,000
36
95,000
66,000
42,000
60,000
36,000
22,000
37
95,400
65,000
39,440
56,000
35,000
20,000
38
100,000
67,200
42,000
58,800
37,000
20,000
39
100,000
65,000
42,000
56,880
34,187
20,000
40
100,000
70,000
45,400
60,000
37,000
22,500
41
97,000
65,000
42,000
55,000
36,000
22,000
42
102,950
68,990
42,000
55,960
36,000
22,000
43
105,000
69,210
44,000
55,000
34,900
21,000
44
109,000
73,000
45,000
58,000
35,000
20,000
45
109,500
71,200
42,400
57,000
37,000
22,000
46
101,800
70,000
44,000
60,000
40,000
23,215
47
108,944
74,000
47,000
61,000
40,000
21,000
48
111,000
73,000
45,000
63,000
37,000
22,000
49
105,000
73,900
46,200
56,000
36,000
21,000
50
109,400
75,000
48,000
60,000
35,000
20,000
51
105,000
70,000
41,744
55,700
37,000
21,860
52
105,000
73,000
44,920
64,000
38,000
23,000
53
109,000
72,800
44,930
62,000
37,000
24,000
54
112,900
73,500
42,000
58,000
35,000
19,000
55
103,000
69,000
40,000
54,000
34,000
19,000
56
100,000
65,000
37,000
52,000
35,000
23,000
57
105,118
66,000
40,000
56,000
36,000
20,800
58
102,000
63,916
32,000
56,000
32,657
20,000
59
100,000
58,488
36,000
51,600
32,300
20,000
60
90,000
56,500
31,000
52,500
32,000
19,000
61
94,000
55,000
33,000
44,000
28,000
17,000
62
88,000
55,000
28,000
50,000
28,000
14,272
63
85,000
44,000
26,000
46,000
25,000
13,000
64
73,000
41,908
22,833
44,000
26,000
12,800
Source: Congressional Research Service analysis of the March 2005 Current Population Survey.

CRS-35
Table A2. Annual Total Return on Stocks and Bonds and
Annual Rate of Change in the Consumer Price Index, 1926-2005
AAA
AAA
Year S&P 500
Bonds
CPI-U
Year
S&P 500
Bonds
CPI-U
1926
8.6%
6.3%
-1.1%
1966
-10.1%
-0.3%
3.5%
1927
33.6%
6.6%
-2.3%
1967
24.0%
-1.2%
3.0%
1928
39.0%
3.4%
-1.2%
1968
11.1%
22.5%
4.7%
1929
-10.8%
4.3%
0.6%
1969
-8.4%
-2.5%
6.2%
1930
-27.4%
6.3%
-6.4%
1970
3.9%
11.2%
5.6%
1931
-45.2%
-2.4%
-9.3%
1971
14.3%
9.7%
3.3%
1932
-7.6%
12.2%
-10.3%
1972
19.0%
8.3%
3.4%
1933
56.5%
5.3%
0.8%
1973
-14.7%
3.0%
8.7%
1934
3.0%
9.7%
1.5%
1974
-26.5%
0.2%
12.3%
1935
42.8%
6.9%
3.0%
1975
37.2%
11.0%
6.9%
1936
31.9%
6.2%
1.4%
1976
24.0%
14.6%
4.9%
1937
-33.2%
2.6%
2.9%
1977
-7.1%
5.5%
6.7%
1938
27.6%
4.4%
-2.8%
1978
6.6%
1.8%
9.0%
1939
1.6%
4.3%
0.0%
1979
18.6%
-1.6%
13.3%
1940
-7.5%
4.5%
0.7%
1980
32.4%
-5.0%
12.5%
1941
-10.6%
1.8%
9.9%
1981
-4.9%
9.0%
8.9%
1942
16.7%
3.1%
9.0%
1982
21.5%
34.9%
3.8%
1943
26.9%
3.4%
3.0%
1983
22.5%
7.3%
3.8%
1944
19.6%
3.1%
2.3%
1984
6.3%
17.1%
3.9%
1945
37.1%
3.5%
2.2%
1985
31.7%
29.5%
3.8%
1946
-5.7%
2.6%
18.1%
1986
18.6%
20.9%
1.1%
1947
3.6%
0.5%
8.8%
1987
5.3%
-1.6%
4.4%
1948
2.5%
3.7%
3.0%
1988
16.5%
13.8%
4.4%
1949
20.4%
4.3%
-2.1%
1989
31.6%
15.3%
4.6%
1950
29.9%
1.9%
5.9%
1990
-3.1%
8.6%
6.1%
1951
20.4%
-0.2%
6.0%
1991
30.4%
15.9%
3.1%
1952
13.8%
3.4%
0.8%
1992
7.6%
10.6%
2.9%
1953
1.4%
2.1%
0.7%
1993
10.1%
14.7%
2.7%
1954
49.0%
4.7%
-0.7%
1994
1.3%
-2.4%
2.7%
1955
24.5%
1.1%
0.4%
1995
37.5%
22.0%
2.5%
1956
9.8%
-1.8%
3.0%
1996
22.9%
4.2%
2.8%
1957
-9.9%
4.5%
2.9%
1997
33.3%
10.9%
2.2%
1958
43.3%
0.9%
1.8%
1998
28.6%
10.9%
1.5%
1959
12.0%
0.2%
1.7%
1999
21.0%
-3.0%
2.6%
1960
0.5%
6.7%
1.4%
2000
-9.1%
11.7%
3.5%
1961
26.9%
3.7%
0.7%
2001
-11.9%
11.5%
2.6%
1962
-8.7%
6.2%
1.3%
2002
-22.1%
11.2%
1.5%
1963
22.8%
3.2%
1.6%
2003
28.7%
9.2%
2.3%
1964
16.5%
4.0%
1.0%
2004
10.9%
6.5%
2.5%
1965
12.5%
2.1%
1.9%
2005
4.9%
7.8%
4.7%
Annual average, 1926 to 2005:
10.0%
6.3%
3.0%
Standard deviation:
19.7%
7.1%
4.3%
Source: Congressional Research Service, compiled from various sources.

CRS-36
Table A3. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 6% of Household Earnings
(Amounts in 2004 dollars)
Married householder
Unmarried householder
Annual household earnings
Annual household earnings
75th
50th
25th
75th
50th
25th
percentile
percentile
percentile
percentile
percentile
percentile
Household begins saving at age 25 (40 years of saving)
95th percentile of returns
Account balance
$2,141,000
$1,447000
$910,000
$1,357,000
$856,000
$503,000
Savings/Final 5 avg. pay
16.8
19.4
21.8
19.4
20.8
22.4
Earnings replacement rate
1.12
1.29
1.45
1.61
1.72
1.85
50th percentile of returns
Account balance
932,000
625,000
389,000
569,000
357,000
210,000
Savings/Final 5 avg. pay
7.3
8.4
9.3
8.1
8.7
9.3
Earnings replacement rate
0.49
0.56
0.62
0.67
0.72
0.77
5th percentile of returns
Account balance
426,000
282,000
174,000
253,000
159,000
93,000
Savings/Final 5 avg. pay
3.3
3.8
4.2
3.6
3.8
4.1
Earnings replacement rate
0.22
0.25
0.28
0.30
0.32
0.34
Household begins saving at age 35 (30 years of saving)
95th percentile of returns
Account balance
1,084,000
726,000
453,000
617,000
384,000
225,000
Savings/Final 5 avg. pay
9.5
10.8
12.1
9.8
10.4
11.1
Earnings replacement rate
0.57
0.65
0.72
0.73
0.77
0.83
50th percentile of returns
Account balance
533,000
353,000
218,000
299,000
186,000
109,000
Savings/Final 5 avg. pay
4.7
5.2
5.8
4.7
5.0
5.4
Earnings replacement rate
0.28
0.31
0.35
0.35
0.37
0.40
5th percentile of returns
Account balance
260,000
170,000
104,000
144,000
90,000
52,000
Savings/Final 5 avg. pay
2.3
2.5
2.8
2.3
2.4
2.6
Earnings replacement rate
0.14
0.15
0.17
0.17
0.18
0.19
Household begins saving at age 45 (20 years of saving)
95th percentile of returns
Account balance
458,000
301,000
181,000
251,000
157,000
91,000
Savings/Final 5 avg. pay
4.4
5.0
5.4
4.4
4.7
5.0
Earnings replacement rate
0.24
0.27
0.29
0.30
0.32
0.34
50th percentile of returns
Account balance
244,000
159,000
95,000
134,000
83,000
48,000
Savings/Final 5 avg. pay
2.4
2.6
2.8
2.4
2.5
2.7
Earnings replacement rate
0.13
0.14
0.15
0.16
0.17
0.18
5th percentile of returns
Account balance
144,000
93,000
55,000
79,000
49,000
28,000
Savings/Final 5 avg. pay
1.4
1.5
1.6
1.4
1.5
1.5
Earnings replacement rate
0.07
0.08
0.09
0.09
0.10
0.11
Source: Congressional Research Service.

CRS-37
Table A4. Retirement Savings and Income Replacement Rates, Based on
Annual Total Contributions Equal to 10% of Household Earnings
(Amounts in 2004 dollars)
Married householder
Unmarried householder
Annual household earnings
Annual household earnings
75th
50th
25th
75th
50th
25th
percentile
percentile
percentile
percentile
percentile
percentile
Household begins saving at age 25 (40 years of saving)
95th percentile of returns
Account balance
3,516,000
2,381,000
1,501,000
2,223,000
1,400,000
825,000
Savings/Final 5 avg. pay
27.6
31.9
36.0
31.7
34.0
36.7
Earnings replacement rate
1.83
2.12
2.39
2.11
2.82
3.04
50th percentile of returns
Account balance
1,542,000
1,036,000
645,000
960,000
603,000
354,000
Savings/Final 5 avg. pay
12.1
13.9
15.5
13.7
14.6
15.7
Earnings replacement rate
0.80
0.92
1.03
1.14
1.21
1.31
5th percentile of returns
Account balance
672,000
445,000
274,000
402,000
251,000
148,000
Savings/Final 5 avg. pay
5.3
6.0
6.6
5.7
6.1
6.6
Earnings replacement rate
0.35
0.40
0.44
0.48
0.51
0.54
Household begins saving at age 35 (30 years of saving)
95th percentile of returns
Account balance
1,822,000
1,219,000
761,000
1,033,000
644,000
377,000
Savings/Final 5 avg. pay
15.9
18.1
20.3
16.4
17.4
18.6
Earnings replacement rate
0.95
1.08
1.21
1.22
1.30
1.39
50th percentile of returns
Account balance
897,000
594,000
365,000
502,000
312,000
183,000
Savings/Final 5 avg. pay
7.8
8.8
9.7
8.0
8.4
9.0
Earnings replacement rate
0.47
0.53
0.58
0.59
0.63
0.67
5th percentile of returns
Account balance
459,000
301,000
184,000
256,000
159,000
93,000
Savings/Final 5 avg. pay
4.0
4.5
4.9
4.1
4.3
4.6
Earnings replacement rate
0.24
0.27
0.29
0.30
0.32
0.34
Household begins saving at age 45 (20 years of saving)
95th percentile of returns
Account balance
721,000
474,000
285,000
395,000
247,000
144,000
Savings/Final 5 avg. pay
7.0
7.8
8.5
7.0
7.4
7.9
Earnings replacement rate
0.38
0.42
0.45
0.47
0.50
0.53
50th percentile of returns
Account balance
410,000
267,000
160,000
225,000
140,000
81,000
Savings/Final 5 avg. pay
4.0
4.4
4.7
4.0
4.2
4.5
Earnings replacement rate
0.21
0.24
0.25
0.27
0.28
0.30
5th percentile of returns
Account balance
234,000
151,000
89,000
129,000
79,000
46,000
Savings/Final 5 avg. pay
2.3
2.5
2.6
2.3
2.4
2.5
Earnings replacement rate
0.12
0.13
0.14
0.15
0.16
0.17
Source: Congressional Research Service