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

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

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.

Trends in Retirement Plan Design...................................................................................................1
Growing Prevalence of Defined Contribution Plans.................................................................2
Retirement Savings of American Households.................................................................................3
Retirement Account Balances in 2004......................................................................................4
Amount of Contributions..........................................................................................................7
How Much Might Workers Accumulate by Age 65?......................................................................11
Methods ................................................................................................................................... 12
What is “Monte Carlo” Analysis?.................................................................................................13
Simulation Results: Retirement Account Balances at Age 65.......................................................13
Variability of Investment Rates of Return...............................................................................14
Length of Investment Period...................................................................................................15
Contribution Rates..................................................................................................................16
Household Earnings................................................................................................................17
Simulation Results: Measuring Retirement Income Adequacy.....................................................18
Annuities: Insurance Against Longevity Risk...............................................................................19
Measuring Earnings Replacement Rates.................................................................................20
Married Couples Versus Singles.............................................................................................22
Detailed Simulation Results....................................................................................................24
Policy Considerations....................................................................................................................27
Conclusion ..................................................................................................................................... 28
Figure 1. Effect of Variability in Investment Rates of Return on Retirement Savings at
Age 65........................................................................................................................................14
Figure 2. Effect of Age at Which Savings Begins on Retirement Savings at Age 65...................16
Figure 3. Effect of Annual Contribution Rate on Retirement Savings at Age 65..........................17
Figure 4. Effect of Household Earnings on Retirement Savings at Age 65...................................18
Figure 5. Estimated Range of Earnings Replacement Rates at Age 65 for a Married-
Couple Household with Median Earnings..................................................................................22
Figure 6. Estimated Retirement Savings at Age 65 or Married Couple and Unmarried
Househol ders .............................................................................................................................. 23
Figure 7. Earnings Replacement Rates at Age 65 of Married Couples and Unmarried
Househol ders .............................................................................................................................. 24
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 .............................................................................................................................................. 5
Table 3. Household Retirement Account Balances in 2004............................................................6
Table 4. Contributions to Employer-Sponsored Plans in 2004........................................................8
Table 5. Contributions to Employer-Sponsored Plans in 2004......................................................10
Table 6. Retirement Savings and Income Replacement Rates, Based on Annual Total
Contributions Equal to 8% of Household Earnings...................................................................25
Table A-1. Household Earnings in 2004, by Age and Marital Status of Householder and
Percentile Rank of Earnings.......................................................................................................30
Table A-2. Annual Total Return on Stocks and Bonds and Annual Rate of Change in the
Consumer Price Index, 1926-2005.............................................................................................31
Table A-3. Retirement Savings and Income Replacement Rates, Based on Annual Total
Contributions Equal to 6% of Household Earnings...................................................................32
Table A-4. Retirement Savings and Income Replacement Rates, Based on Annual Total
Contributions Equal to 10% of Household Earnings.................................................................34
Appendix. Historical Data and Estimates of Savings....................................................................30
Author Contact Information..........................................................................................................36

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 ¹
the workers who participate in the plan. 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}
¹⁹⁸^{0 148,}⁰⁹⁶^30,1^00,0⁰⁰^340,⁸⁰⁵^18,8^86,0⁰⁰
¹⁹⁸^{5 170,}¹⁷²^28,8^95,0⁰⁰^461,⁹⁶³^33,1^68,0⁰⁰
¹⁹⁹^{0 113,}⁰⁶²^26,2^05,0⁰⁰^599,²⁴⁵^35,3^40,0⁰⁰
¹⁹⁹^{5 69,4}⁹²^23,3^95,0⁰⁰^623,⁹¹²^42,2^03,0⁰⁰
²⁰⁰^{0 48,7}⁷³^22,2^18,0⁰⁰^686,⁸⁷⁸^50,8^74,0⁰⁰
²⁰⁰^{3 47,0}³⁶^21,3^04,0⁰⁰^652,⁹⁷⁶^51,8^28,0⁰⁰
^Source:^{U.S. Department of La}^b^or,^{Private Pension Plan Bulletin: Abstract of Form 5500 Annual Reports}^{, various}
^years.
^Note:^{Active participants are wo}^rkers^{participating in}^{plans at t}^{heir cur}^{rent jobs.}
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

¹^E^R^IS^A^go^vern^{s o}ⁿ^l^y^p^rⁱ^v^at^e-se^ct^o^r^p^l^aⁿ^s.^Retⁱ^r^em^en^t^p^l^an^{s o}^f^f^e^red^b^y^st^at^{e an}^d^l^o^cal^go^vern^m^eⁿ^t^{s t}^o^t^h^ei^r^em^p^l^o^y^ees
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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. The accumulated savings is then
converted into an annuity to illustrate the share of pre-retirement earnings that the accumulated
retirement savings could replace.
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 ²
current pay into a retirement plan on a pre-tax basis. 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 ³
accrue on a tax-deferred basis until the money is withdrawn. 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 ⁴
participated in both types of plan.
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 ⁵
sponsored DC plans did not participate in these plans in 2006.
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

²^D^e^fⁱ^ne^{d c}^ontrⁱ^b^u^ti^on^plaⁿ^s^ha^{d e}^x^is^te^{d f}^o^r^m^aⁿ^y^y^e^a^r^s^,^but^pr^ior^to^eⁿ^a^c^t^m^e^{nt of}^I^.^R^.^C^.^§4⁰¹⁽^k⁾^{, t}^h^e^y^w^e^r^e^f^unde^d^by
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^s^pons^or^e^d^a^D^C^plaⁿ^w^e^r^e^e^lig^ible^{to pa}^r^ticⁱ^p^a^t^e^,^t^h^e^s^e^fⁱ^g^u^r^e^sⁱ^m^pl^y^a^pa^r^tic^ipa^tio^{n r}^a^te^of⁸⁰^%^a^m^oⁿ^g^e^lig^ible
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^of^L^a^bor^Sta^tis^tic^s^,^Sum^m^a^r^y^06-^{05, A}^u^g^.²⁰⁰⁶^,^Ta^b^l^{e 2}^{, p. 7.)}

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 ⁶
who are not covered by a retirement plan at work. 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; ⁷
however, withdrawals from a Roth IRA during retirement are tax-free.
The Survey of Consumer Finances
^{This Congressional Research Ser}^{vice report}^prese^{nts data on r}^etirement^{plan pa}^{rticipation and reti}^{rement sa}^vings
^account^{balances collected throu}^{gh the}^{Survey of Consumer Finances}^{(SCF) in 200}^{4, the most}^recen^t^{year for w}^hich
^{survey data a}^{re available. The SCF is an interview s}^urvey^sponsore^{d by the Board of}^{Governors of t}^{he Federal}
^{Reserve System in cooperation w}^{ith the Depa}^rtment^{of the Trea}^su^{ry. It is conducted once}^every^thr^{ee years to}
^{collect information on the assets}^{and liabilit}^{ies of U.S}^{. households, the sourc}^{es and amo}^{unts of t}^heir^{income, their}
^{demographic cha}^{racteristics, emp}^{loyment, and participation in em}^p^{loyer-sponsored health a}^{nd retir}^{ement pla}^{ns. Data}
^{from the SCF are widely used}^by^{economists at the Federal Reserv}^{e, other governme}^{nt age}^{ncies, an}^{d by p}^rivate-
^{sector researc}^{h orga}^{nizations and academic institutions to study t}^{rends in t}^{he amou}^{nt and distrib}^ut^{ion of assets and}
^liabil^{ities among U.S}^{. households. Since 19}^{92, SCF data have}^been^c^{ollected by the National Organiz}^{ation for Research}
^{at the Univer}^{sity of Chicago (NO}^{RC). In 200}^{4, 4,5}²²^house^{holds were interviewed for t}^{he SCF, represe}^{nting a total}
^{of 11}^{2.1 million U.}^{S. households.}⁸^{Like all household surveys, th}^{e SCF is subject to reporting}^error.

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 ⁹
spouse, or both participated in a defined contribution retirement plan. (See Table 2.) Some

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^inc^o^m^e^f^o^r^a^sⁱ^ng^le^indivⁱ^dua^l.
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^de^fⁱ^nition^of^a^f^a^mⁱ^l^y^{. (For m}^o^reⁱⁿ^f^o^rm^a^{tion, se}^e^Buc^k^{s, Ke}^nnic^k^e^{ll, a}ⁿ^d^Mo^ore^,^Fe^de^{ral Re}^se^rv^e^Bu^lle^tin^{, 20}⁰⁶^.)
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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 ¹⁰
participate.
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
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 ¹¹
contributed to the plan. Three-fourths of all participating households reported that both the
household and the employer contributed to the plan.
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 ¹²
single persons (although they do not necessarily need twice as much income.) 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, the
second row of Table 3 shows 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.

¹⁰^S^ee^Na^tioⁿ^a^{l Co}^m^p^en^sa^tⁱ^oⁿ^S^u^{rvey: Emp}^l^o^{yee Ben}^e^{fits i}ⁿ^Priva^t^e^In^d^u^stry^{, U}^.^{S. D}^e^pa^r^t^m^e^{nt of}^L^a^bor^{, B}^u^r^e^a^u^of
^L^a^bor^Sta^tis^tic^s^,^S^u^m^m^a^r^y^06-⁰⁵^,^A^u^g^u^s^t²⁰⁰^6.^Som^e^w^o^r^k^e^r^s^w^hos^e^em^ploy^e^r^of^f^e^r^s^a^plaⁿ^m^a^y^{not be}^e^lig^ible^t^o
^pa^r^tic^ipa^t^e^if^the^y^a^r^e^unde^r^a^g^e^{21, ha}^v^e^le^s^s^thaⁿ^oⁿ^e^y^e^a^r^of^s^e^r^v^ic^e^,^or^w^o^r^k^le^s^s^thaⁿ^1,⁰⁰⁰^ho^ur^s^{in a}^y^e^a^r^.
¹¹^Iⁿ^aⁿ^y^pa^r^tic^ula^rⁱⁿ^s^t^aⁿ^c^e^{it is}^po^s^sⁱ^ble^tha^t^only^the^h^ous^e^h^old^or^t^h^e^e^m^plo^y^e^r^c^ontrⁱ^bu^te^{d t}^o^t^h^e^pl^aⁿ^{. A}^s^s^u^mⁱ^ng
^t^h^at^each^ho^u^s^eho^l^{d an}^sw^ered^t^h^{e su}^rve^y^q^u^e^stⁱ^oⁿ^s^c^o^rrect^l^y^,^t^h^o^s^{e t}^h^at^repo^rt^ed^t^h^at^t^h^{e ho}^u^s^eho^l^d^di^d^no^t^c^oⁿ^t^ri^b^u^t^e
^{to t}^h^e^plaⁿ^w^ould^be^pa^r^ticⁱ^p^a^ting^on^the^ba^sⁱ^s^of^em^ploy^e^r^c^ontrⁱ^b^u^tio^ns^oⁿ^ly^.
¹²^Iⁿ^t^h^e^s^e^ta^ble^s^{, the}^ho^us^e^hol^de^rⁱ^s^c^l^a^s^sⁱ^fⁱ^e^d^by^his^or^he^r^le^g^a^{l m}^a^r^ita^{l s}^t^a^t^us^a^t^t^h^e^tim^e^the^inte^r^v^ie^w^w^a^s^c^onduc^te^d^.

Table 3 also shows the 75^th percentile and the 25^th percentile retirement of account balances. At ^th
the 75 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 ^th
of all such households had total retirement assets of more than $44,000. At the 25 percentile,
married couple households headed by persons under age 35 had total retirement assets of $5,400
in 2004.
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. ^th
Likewise, at the 75 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 ^th

couple households in this age group. At the 25 percentile, households headed by unmarried
individuals between the ages of 45 and 54 had total retirement assets of $11,400, compared with
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 ¹³
$662 per month ($7,944 per year), based on the current annuity interest rate of 5.25%. 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 ¹⁴
in 2004.
Table 2. Household Participation in Defined Contribution Plans at Current
Employer in 2004
^Amon^g^pa^{rticipating househ}^olds:
^Households^Household^Household^Employer(s)^Both
^{with working}^{participates in}^{contributes to}^{contribute to}^contribute
^{head or s}^pouse^a^{a DC plan}^b^{the plan}^{the plan}^{to the plan}
^{Age of}^househ^older
^{Under 3}⁵^22,8⁸⁰^36.6%^89.1%^85.0%^77.1%
^{35 to 4}⁴^21,6⁰¹^49.6^88.6^83.0^73.5
^{45 to 5}⁴^20,6⁹³^51.9^90.7^80.9^72.5
^{55 or older}^19,4⁹⁹^40.5^89.9^85.4^77.6

¹³^T^h^is^is^theⁱⁿ^te^r^e^s^t^r^a^te^on^aⁿⁿ^u^iti^e^s^is^s^u^e^d^by^Me^tLⁱ^f^e^{in J}^a^nua^r^y²⁰⁰⁷^.
¹⁴^Me^diaⁿ^ho^us^e^h^o^l^{d e}^a^rⁿⁱ^ng^sⁱⁿ²⁰^{04 w}^e^r^e^c^a^l^c^u^la^te^{d by}^C^R^S^f^r^o^m^C^e^ns^us^B^u^r^e^a^u^da^ta^.

^Amon^g^pa^{rticipating househ}^olds:
^Households^Household^Household^Employer(s)^Both
^{with working}^a^{participates in}^b^{contributes to}^{contribute to}^contribute
^{head or s}^pouse^{a DC plan}^{the plan}^{the plan}^{to the plan}
^{Marital status}
^Married^47,8^{45 51.3}^90.1^85.2^77.2
^householder
^Single^36,8^{28 35.8}^88.6^80.0^70.6
^householder^c
^{Married househ}^older
^{Under 3}⁵^9,66³^46.5^88.8^86.0^79.8
^{35 to 4}⁴^12,5³⁰^58.8^88.8^83.7^74.1
^{45 to 5}⁴^12,9⁹⁸^55.9^91.7^85.0^77.5
^{55 or older}^12,6⁵⁴^42.8^90.7^86.7^78.7
^{Single householder}^c
^{Under 3}⁵^13,2¹⁷^29.4^89.5^83.8^74.0
^{35 to 4}⁴^9,07¹^36.9^88.1^81.6^72.1
^{45 to 5}⁴^7,69⁶^45.2^88.5^72.5^62.2
^{55 or older}^6,84⁵^36.1^88.2^82.3^75.1
^{Total 84,6}⁷³^44.5%^89.6%^83.4%^74.9%
^Source:^{CRS analysis of the Fed}^{eral Reserve Board’s 20}⁰⁴^{Survey of Consumer Finances.}
^a.^{Households with an e}^{mployed householder and/or em}^{ployed spou}^se/partn^{er, in thou}^sands.
^b.^{Householder, householder’s spo}^{use, or both}^{participate in a de}^fin^{ed contribution pla}^{n at work.}
^c.^Includes^{householders w}^{ho are w}^idowed^{, divorced}^{, separated, or never ma}^rried.
Table 3. Household Retirement Account Balances in 2004
^{Total of all}^{Ratio of total}
^{Balance in all}^retirement^retirement
^{DC plans at}^acc^{ounts in}^{savings to ann}^ual
^cur^{rent job}^household^a^household
^earnings
^{Married Householder, by A}^g^e
^{Under 35}
⁷⁵^th^per^centile^$30,0⁰⁰^$44,0⁰⁰^.515
⁵⁰^th^per^{centile (median)}^13,0⁰⁰^19,0⁰⁰^.267
²⁵^th^per^centile^4,70⁰^5,40⁰^.094
^{35 to 44}
⁷⁵^th^per^centile^82,0⁰⁰^115,⁰⁰⁰^1.10⁰
⁵⁰^th^per^{centile (median)}^35,0⁰⁰^47,6⁰⁰^.534
²⁵^th^per^centile^10,0⁰⁰^14,0⁰⁰^.179

^{Total of all}^{Ratio of total}
^{Balance in all}^retirement^retirement
^{DC plans at}^acc^{ounts in}^{savings to ann}^ual
^cur^{rent job}^household^a^household
^earnings
^{45 to 54}
⁷⁵^th^per^{centile 186,}⁰⁰⁰^275,⁰⁰⁰^2.24
⁵⁰^th^per^{centile (median)}^64,0⁰⁰^103,²⁰⁰^.897
²⁵^th^per^centile^20,0⁰⁰^30,0⁰⁰^.321
^{55 and older}
⁷⁵^th^per^{centile 192,}⁰⁰⁰^373,⁰⁰⁰^4.83⁰
⁵⁰^th^per^{centile (median)}^49,0⁰⁰^119,⁵⁰⁰^1.55⁵
²⁵^th^per^centile^12,0⁰⁰^35,0⁰⁰^.535
^{Single Householder, by Age}
^{Under 35}
⁷⁵^th^per^{centile $12,0}⁰⁰^$16,0⁰⁰^.324
⁵⁰^th^per^{centile (median)}^5,50⁰^7,00⁰^.153
²⁵^th^per^centile^2,00⁰^2,50⁰^.063
^{35 to 44}
⁷⁵^th^per^centile^29,0⁰⁰^40,0⁰⁰^.858
⁵⁰^th^per^{centile (median)}^12,9⁰⁰^14,0⁰⁰^.366
²⁵^th^per^centile^3,90⁰^5,00⁰^.121
^{45 to 54}
⁷⁵^th^per^centile^70,0⁰⁰^80,0⁰⁰^1.73¹
⁵⁰^th^per^{centile (median)}^24,0⁰⁰^32,0⁰⁰^.860
²⁵^th^per^centile^7,90⁰^11,4⁰⁰^.232
^{55 and older}
⁷⁵^th^per^{centile 125,}⁰⁰⁰^176,⁰⁰⁰^3.77¹
⁵⁰^th^per^{centile (median)}^25,0⁰⁰^65,0⁰⁰^1.40⁶
²⁵^th^per^centile^9,00⁰^13,0⁰⁰^.407
^Source:^{Congressional Researc}^h^{Service analysis of the}²⁰⁰⁴^{Survey of Consumer Finances}^.
^a.^{Includes defined con}^tribution^{plans from c}^u^r^{rent a}^{nd past}^{jobs an}^{d individual retirement accounts}^(IRAs).
^{Only accou}^{nts with}^{balances of}^$¹^{or more are}^{included in the}^pe^{rcentile rankings.}
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 ¹⁶
contributed to the plan, and in other cases only the employer contributed.
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 ^th

about 3% of household earnings at the 25 percentile of contributions to about 10% of household ^th
earnings at the 75 percentile of contributions.
Table 4. Contributions to Employer-Sponsored Plans in 2004
^{(in 2004 dollars)}
^Household^Employer^Total
^contribution^contribution^{contribution to}
^{to DC plan}^{to DC plan}^{DC plan}
^{Married Householder, by A}^g^e
^{Under 35}
⁷⁵^th^per^centile^$6,96⁰^$4,08⁰^$10,4⁰⁰

¹⁵^T^h^e^m^a^xⁱ^m^u^m^a^nnua^{l de}^f^e^r^r^a^{l into a}^D^C^p^l^aⁿ^is^s^ubje^c^t^t^o^I^.^R^.^C^.^§⁴⁰²⁽^g⁾^.^A^s^e^s^ta^blis^he^{d by}^P^.^L^.¹⁰⁷^-¹^{6, t}^h^e
^m^a^xⁱ^m^u^m^em^plo^y^e^e^c^ontrⁱ^b^u^ti^on^unde^r^I^.^R^.^C^.^§4⁰²⁽^g⁾^is^$1^5,⁵⁰^{0 i}ⁿ²⁰⁰⁷^aⁿ^{d is}ⁱ^nde^x^e^{d i}ⁿ^$⁵⁰⁰ⁱⁿ^c^r^em^eⁿ^ts^{. W}^o^r^k^e^r^s
^a^g^e^{50 a}^nd^ol^de^{r c}^aⁿ^c^oⁿ^t^rib^u^te^aⁿ^a^d^d^itio^na^l^$5,⁰⁰^{0. U}^nde^{r I.R}^.^C.^§4^15(c⁾^,^the^lim^{it o}ⁿ^t^o^ta^{l a}ⁿ^nua^l^a^dditi^ons^to
^de^fⁱ^ne^{d c}^ontrⁱ^bu^tio^{n p}^l^aⁿ^s^—^c^o^m^p^rⁱ^sⁱ^ng^t^h^e^s^u^m^of^em^ploy^e^r^a^{nd em}^ploy^ee^c^ontrⁱ^b^u^ti^ons^—ⁱ^s^$4^5,0^{00 i}ⁿ²⁰^07.^T^h^e
^§41^5(c⁾^lim^{it is in}^de^x^e^{d in}^$1^,0⁰⁰^inc^r^e^m^eⁿ^ts.
¹⁶^Unlik^e^the^c^a^l^c^u^la^tioⁿ^of^a^m^e^aⁿ^{, w}^h^eⁿ^c^a^l^c^u^la^ting^pe^rc^eⁿ^tile^{s, z}^e^r^{o v}^a^lue^s^a^r^e^e^x^c^l^ude^{d. T}^h^e^r^e^f^ore^,^a^ltho^u^g^h^the
^m^e^aⁿ^hous^e^h^old^c^oⁿ^t^rⁱ^b^u^ti^{on a}^nd^m^e^aⁿ^em^ploy^e^r^c^ontrⁱ^buti^{on s}^u^m^{to t}^h^e^m^e^aⁿ^tota^{l c}^ontrⁱ^but^io^{n, t}^h^e^m^e^diaⁿ
^hous^e^hol^{d c}^o^ntrⁱ^b^u^ti^on^a^{nd m}^e^diaⁿ^e^m^ploy^e^r^c^ontrⁱ^b^u^ti^on^doⁿ^o^{t ne}^c^e^s^s^a^rⁱ^l^y^s^u^m^{to the}^tota^l^m^e^diaⁿ^c^ontrⁱ^buti^oⁿ^.

^Household^Employer^Total
^contribution^contribution^{contribution to}
^{to DC plan}^{to DC plan}^{DC plan}
⁵⁰^th^per^{centile (median)}^3,68⁰^2,52⁰^5,52⁰
²⁵^th^per^centile^1,80⁰^1,35⁰^3,12⁰
^{35 to 44}
⁷⁵^th^per^centile^8,80⁰^5,50⁰^13,1⁶⁰
⁵⁰^th^per^{centile (median)}^4,44⁰^2,88⁰^6,60⁰
²⁵^th^per^centile^2,28⁰^1,56⁰^3,60⁰
^{45 to 54}
⁷⁵^th^per^centile^11,4⁰⁰^6,44⁰^14,7⁰⁰
⁵⁰^th^per^{centile (median)}^6,00⁰^3,12⁰^8,76⁰
²⁵^th^per^centile^2,88⁰^1,60⁰^4,44⁰
^{55 and older}
⁷⁵^th^per^{centile 12,0}⁰⁰^6,21⁰^15,9⁶⁰
⁵⁰^th^per^{centile (median)}^5,40⁰^3,00⁰^7,86⁰
²⁵^th^per^centile^2,28⁰^1,32⁰^3,64⁰
^{Single Householder, by Age}
^{Under 35}
⁷⁵^th^per^{centile $3,96}⁰^$2,52⁰^$5,64⁰
⁵⁰^th^per^{centile (median)}^2,08⁰^1,40⁰^3,12⁰
²⁵^th^per^centile⁹⁶⁰⁷⁸⁰^1,56⁰
^{35 to 44}
⁷⁵^th^per^centile^3,60⁰^3,38⁰^6,76⁰
⁵⁰^th^per^{centile (median)}^2,34⁰^1,90⁰^3,60⁰
²⁵^th^per^centile^1,20⁰⁹⁶⁰^2,08⁰
^{45 to 54}
⁷⁵^th^per^centile^5,40⁰^3,80⁰^8,40⁰
⁵⁰^th^per^{centile (median)}^3,12⁰^2,20⁰^4,32⁰
²⁵^th^per^centile^1,80⁰^1,10⁰^2,40⁰
^{55 and older}
⁷⁵^th^per^{centile 9,24}⁰^3,60⁰^12,0⁰⁰
⁵⁰^th^per^{centile (median)}^4,20⁰^2,04⁰^5,76⁰
²⁵^th^per^centile^1,80⁰^1,08⁰^2,30⁰
^Source:^{Congressional Researc}^h^{Service analysis of the}²⁰⁰⁴^{Survey of Consumer Finances}^.
^Note:^{Employer and employee c}^{ontributions do not su}^{m to the t}^{otal because in some ca}^{ses only t}^{he hous}^ehold
^{contributed to th}^{e plan, and in}^{other case}^{s only the e}^{mployer cont}^ributed.

Table 5. Contributions to Employer-Sponsored Plans in 2004
^{(as a per}^{centage of household}^earnings)
^Household^Employer^Total
^contribution^contribution^contribution
^{to DC plan}^{to DC plan}^{to DC plan}
^{Married Householder, by A}^g^e
^{Under 35}
⁷⁵^th^per^centile^9.3%^5.1%^13.8%
⁵⁰^th^per^{centile (median)}^5.1^3.1^8.1
²⁵^th^per^centile^{2.9 2.0 4.8}
^{35 to 44}
⁷⁵^th^per^centile^8.3^6.0^12.2
⁵⁰^th^per^centile^(median)^{5.3 3.6 8.4}
²⁵^th^per^centile^{3.1 2.3 5.2}
^{45 to 54}
⁷⁵^th^per^centile^9.4^5.9^13.8
⁵⁰^th^per^centile^(median)^{6.2 3.7 9.1}
²⁵^th^per^centile^{4.0 2.4 6.1}
^{55 and older}
⁷⁵^th^per^{centile 10.4}^6.1^15.8
⁵⁰^th^per^{centile (median)}^6.7^4.0^10.2
²⁵^th^per^centile^{3.8 2.3 6.0}
^{Single Householder, by Age}
^{Under 35}
⁷⁵^th^per^{centile 7.7%}^5.1%^11.5%
⁵⁰^th^per^{centile (median)}^4.7^3.4^7.4
²⁵^th^per^centile^{3.0 2.2 4.7}
^{35 to 44}
⁷⁵^th^per^centile^8.1^7.0^12.7
⁵⁰^th^per^centile^(median)^{5.5 4.9 9.7}
²⁵^th^per^centile^{4.0 2.4 5.9}
^{45 to 54}
⁷⁵^th^per^centile^10.1^7.3^14.9
⁵⁰^th^per^{centile (median)}^6.0^5.0^10.0
²⁵^th^per^centile^{4.0 3.1 6.1}
^{55 and older}
⁷⁵^th^per^{centile 13.1}^7.5^19.8

^Household^Employer^Total
^contribution^contribution^contribution
^{to DC plan}^{to DC plan}^{to DC plan}
⁵⁰^th^per^{centile (median)}^9.7^4.1^13.2
²⁵^th^per^centile^{4.9 3.0 7.1}
^Source:^{Congressional Researc}^h^{Service analysis of the}²⁰⁰⁴^{Survey of Consumer Finances}^.
^Note:^{Employer and employee c}^{ontributions do not su}^{m to the t}^{otal because in some ca}^{ses only t}^{he hous}^ehold
^{contributed to th}^{e plan, and in}^{other case}^{s only the e}^{mployer cont}^ributed.

The previous section 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. This section uses 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 ¹⁷
could accumulate by age 65.
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-¹⁸
sponsored plan also did not own an IRA. 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? These questions are addressed in this section of the report.
As 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 ¹⁹
reach retirement age, including the following:
• household earnings;
• the amount that the household saves;

¹⁷^T^h^{e CP}^S^rat^h^{er t}^h^an^t^h^{e S}^C^F^w^a^{s u}^s^ed^{as t}^h^{e s}^o^u^r^{ce o}^f^earnⁱⁿ^g^{s becau}^{se i}^t^s^m^u^ch^l^a^{rger sa}^m^p^l^e^si^z^e^(m^o^r^{e t}^h^an
^70,⁰⁰^{0 h}^ous^e^h^ol^ds⁾^a^llow^e^{d us}^t^o^e^s^tim^a^t^e^hous^e^h^{old e}^a^rⁿⁱ^ng^s^a^m^ong^m^a^r^rⁱ^e^d^-^c^ouple^a^nd^unm^a^r^rⁱ^e^d^ho^us^e^hol^de^r^s^by
^indivⁱ^d^u^a^l^y^e^a^r^of^ag^e^r^a^the^r^thaⁿ^{in a}^g^e^g^r^oups^{. O}^u^r^e^s^tim^a^t^e^s^of^f^u^tur^e^r^e^tir^e^m^eⁿ^t^accu^m^u^l^a^tⁱ^oⁿ^s^{are b}^a^sed^on^ann^u^a^l
^coⁿ^t^ri^b^u^tⁱ^oⁿ^s^{as a}^p^e^rcen^t^a^{ge o}^f^e^a^rnⁱⁿ^gs.^T^h^eref^o^r^e,^t^h^{e S}^C^F^asset^d^a^t^a^w^e^{re n}^o^tⁿ^eed^ed^.
¹⁸^A^c^c^o^rding^t^o^the²⁰⁰⁴^SCF,³⁸^.8^m^{illion h}^ouse^h^olds^ha^d^ba^la^nc^e^s^{in DC p}^l^aⁿ^{s i}ⁿ²⁰⁰⁴^,³²^{.6 m}^illioⁿ^ho^use^hol^ds
^ow^ne^{d a}ⁿ^IRA^,^a^nd^15.^{0 m}^illion^ha^{d b}^o^t^h^a^{DC p}^l^aⁿ^aⁿ^{d a}ⁿ^IRA^.^Of^{73.3 m}^illion^U.S.^ho^us^e^h^{olds t}^h^a^t^di^d^not^ow^{n a}
^{DC pla}ⁿ^f^r^om^c^u^rre^{nt or}^pa^{st e}^m^ploy^m^e^{nt in 20}⁰⁴^{, o}ⁿ^ly^17.6^m^illio^{n (2}^4.^0%^{) ow}^ne^{d a}ⁿ^IRA^.^(CRS^Re^{port RL}³⁰⁹²^2,
^Re^tir^e^m^eⁿ^{t Sav}ⁱ^ngs^an^{d H}^o^us^e^hol^{d W}^e^alth:^Tr^e^nds^fr^om²⁰⁰¹^t^o²⁰⁰⁴^{, by}^P^a^tric^k^P^u^rc^e^ll.)
¹⁹^H^ous^e^h^olds^m^a^y^ha^v^e^w^e^a^{lth ot}^h^e^r^thaⁿ^r^e^tir^e^m^eⁿ^{t a}^c^c^ounts^,ⁱⁿ^c^l^u^d^ing^o^t^he^r^fⁱ^na^nc^ia^{l a}^s^s^e^ts^a^nd/^or^a^hom^e^tha^t^the^y
^ow^{n. T}^h^is^r^e^por^{t f}^o^c^u^s^e^s^oⁿ^r^e^tir^e^m^eⁿ^{t s}^a^vⁱ^ng^s^a^c^c^ounts^.

• 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.
To estimate household savings, household earnings also had to be estimated. For the base year of
our analysis, earnings were estimated in 2004 at every age from 25 through 64 for married-couple ^th^th^th
and unmarried households at the 75, 50, and 25 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, earnings were increased 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, the 2004 median earnings of married-couple
households headed by a 26-year-old ($45,600) were multiplied 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-²
couple household headed by a 27 year-old, ($50,000) multiplied by 1.011. The process for each
household through age 64 was repeated. 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, ²⁰
starting at age 25, age 35, or age 45. 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 was estimated
for those that contribute consistently.
To estimate the amount that households would have accumulated in their retirement account by
age 65, the annual rate of return on the funds invested in those accounts had to be estimated.
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

²⁰^T^h^e^am^ounts^r^e^pr^e^s^eⁿ^t^the^t^o^ta^{l a}^nnua^l^c^ontrⁱ^b^u^tio^{n t}^o^t^h^e^plaⁿ^{, a}^s^a^pe^r^c^eⁿ^ta^g^e^of^e^a^r^ning^s^.^W^e^{do not d}ⁱ^f^f^e^r^eⁿ^tia^te
^be^tw^e^eⁿ^w^o^r^k^e^r^c^ontrⁱ^but^io^ns^aⁿ^d^e^m^plo^y^e^r^c^ontrⁱ^but^io^ns^.

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.

^{Monte Carlo}^{analysis is a method of estimating the p}^{robable outco}^{me of an eve}^{nt in w}^{hich one}^or^{more of the}
^{variables affecting t}^{he outcome a}^{re random. The ter}^{m was coined}^{by mat}^{hematicians in t}^{he 1}⁹⁴^0s^{who likened}
^{probability analysis to studying t}^h^e^{games of cha}^nce^{played in the}^c^{asinos of Monte Carlo. One com}^{mon use of}^Monte
^{Carlo simulations is to i}^{llustrate how the va}^{riability of investment}^{rates of ret}^urn^{can a}^{ffect t}^{he am}^{ount that}^workers
^{will accumulate in a retireme}^{nt a}^{ccount. The esse}^{nce of a}^Monte^{Carlo estimation process is to simulate an eve}^nt
^{many times, allowing the random}^{variable to vary according to its}^{mathematical mean a}^{nd variance,}^{and the}^{n ran}^k
^{each outcome according to t}^{he likelihood of}^{its occurren}^{ce. Using Monte Carlo methods, we can}^e^{stimate not just}
^{the res}^{ult that will occur “on ave}^{rage,” but also the likelihood of results that a}^{re significantly above}^{or below the}
^{average. In othe}^{r words, Monte}^{Carlo methods of estimation allo}^{w us to incorporate}^{into our esti}^{mates the eleme}^nt
^of^risk^.
^{Monte Carlo estimation methods utilize not just the average}^value^{of a random variable, bu}^{t also the}^{distribution of}
^{values around t}^{he ave}^{rage. For example, rates of}^retur^{n in t}^{he sto}^{ck market va}^{ry from}^{year to year}^{. The nominal rate}
^{of retur}^{n on t}^he^{Standard & Poor’}^{s 500}^{index of stocks a}^{veraged 1}^0.0%^between¹⁹²⁶^and²⁰^{05, b}^u^t^ann^{ual rates of}
^retur^{n varied widely around this}^{average, producing a}^{standard de}^{viation of 19.7%. Likewise, while the nominal an}^nual
^retur^{n on AAA-rated cor}^porate^{bonds averaged}^6.3%^between¹⁹^{26 a}^{nd 2}⁰⁰^{5, the sta}^{ndard deviation around t}^his
^{average was}^{7.1%. (Appe}^ndix^Ta^{ble A-2}^{shows an}^{nual rates of}^re^turn.)
^{To estimate the likely rate of ret}^{urn t}^{hat a}ⁿ^investme^{nt would ach}^{ieve over a 40-yea}^{r pe}^{riod, for example, Monte}
^{Carlo simulation software genera}^{tes a rate of re}^tur^{n for eac}^{h yea}^r^{based on t}^{he distribution of}^{probable rates of}
^retur^{n, as derived from}^historical^{data. The program t}^{hen sim}^{ulates the}^40-year^{period a second ti}^{me, again}
^{generating a}^{rate of ret}^ur^{n for ea}^{ch year}^{from th}^{e p}^{robability distribution of rates of r}^etur^{n. The p}^r^{ocess is repeated}
^{until the simulation is completed, and thousa}^{nds of 4}^{0-year in}^vest^{ment pe}^{riods have be}^{en sim}^{ulated. The results of}
^{the simulation—in this case, inve}^{stment rate}^{s of ret}^urn—a^{re t}^hen^ranked^{by pe}^rcentiles.
^{In our}^{simulation of a 40-yea}^{r pe}^{riod in which 1}^{00% of}^{assets we}^r^e^{invested in common stocks, t}^h^e^{mean real rat}^{e of}
^retur^{n in}^5,00^{0 iterations (simulating a 40-yea}^{r pe}^{riod 5,000 times}^{) was 6.8%, whic}^{h is the}^{same as}^{the actual mea}ⁿ
^{real rate of ret}^{urn o}ⁿ^{common st}^{ocks in the}^{period from 1}⁹²⁶^th^r^{ough 2}⁰⁰^{5. (1.10/}^1.03^{= 1.0}⁶⁸⁾^H^{owever, in 5% of}
^{those 5,0}^{00 iterations, the}^mean^{real rate of ret}^{urn ove}^{r the}⁴^0-ye^{ar period was 1.5}^{% or less, while at the other}
^{extreme, in}^{5% of t}^{he 5,0}⁰⁰^itera^{tions, the mean r}^{eal rate of ret}^ur^{n over th}^{e 4}^0-year^{period was 12}^{.1% or more. In}
^{terms of evaluating}^{risk, these re}^{sults imply an e}^xpe^{cted an}^{nual av}^{erage real rate of}^retur^{n on com}^{mon stocks over}
^{any given}^40-year^pe^{riod of 6.8%, and a 9}^0%^proba^{bility that the av}^{erage an}^{nual real rate of}^retu^{rn o}^{ver that}^period
^{will be between}^{1.5% a}^{nd 12.}^1%.^{With this information about t}^{he l}^{ikely range of outcomes, a hous}^e^{hold might choose}
^{to save more or less tha}^{n th}^{ey ha}^{d been sa}^{ving be}^{fore, depending}^{on their tolerance}^{for risk.}

Figures 1 through 4 illustrates 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 ^th
of return. Referred to are households with earnings at the 75 percentile for their age and marital ^th^th
status as “high earners,” and to those with earnings at the 50 and 25 earnings percentiles as
“median earners” and “low earners,” respectively.

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
^$96^1,⁰⁰⁰^$¹^,⁰⁰⁰^,⁰⁰⁰
^$900^,⁰⁰⁰^ars
^l
^$800^,⁰⁰⁰^d^o^l
^$700^,⁰⁰⁰⁴
^$600^,⁰⁰⁰^,ⁱⁿ²⁰⁰
^$4^68,⁰⁰⁰^$500^,⁰⁰⁰^g^s
ⁱⁿ
^$400^,⁰⁰⁰^t^sav
^$300^,⁰⁰⁰^en
^$214^,⁰⁰⁰^rem
^$200^,⁰⁰⁰^e^tⁱ
^$100^,⁰⁰⁰^R
^$0
^5t^h^perc^e^ntⁱ^l^e^of^re^t^u^rns^50t^{h p}^e^rc^eⁿ^tⁱ^l^e^of^ret^u^rns⁹^5t^{h p}^e^rc^en^tⁱ^l^e^of^ret^u^rns
^Iⁿ^v^e^st^m^eⁿ^t^rat^e^o^f^ret^u^rⁿ⁽^p^erc^en^tⁱ^l^e^ran^k⁾
^Source:^{Congressional Researc}^h^Service.
^Note:^Ret^{irement savings at}^age^{65 of a}^{married-couple hou}^{sehold with median earnings}^{that co}^nt^ributes^{8% of}
^{pay an}^{nually for}^{30 yea}^{rs b}^eginni^{ng at age}^{35, by}^investme^{nt rate}^{of retur}^n.
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 ^th
investment returns were at the 5 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.
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 ^th
the average rate of return were significantly below the median (at the 5 percentile of likely rates ^th
of return) or significantly above the median (at the 95 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.
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 ^th
when they were saving were in the 95 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 ^th
during that period were at the 50 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 ^th
the 50 percentile of likely returns, but they would have just $370,000 if investment returns were ^th
at the 5 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 Savings Begins on Retirement Savings at Age 65
^Source:^{Congressional Researc}^h^Service.
^Note:^Ret^{irement savings at}^age^{65 of a}^{married-couple hou}^{sehold with median earnings}^{that co}^nt^ributes^{8% of}
^{earnings a}ⁿⁿ^{ually beginning at}^age^{35, b}^y^{age at w}^{hich saving}^begins^{and investme}^{nt rate of}^retu^rn.
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 ^th
age 65 if the real rate of return over that period were at the 50 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 ^th
Figure 3 show that if the average real rate of return over 30 years were in the 5 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 ^th^th
rates of return during that period had been at the 95 percentile. Similarly, with returns at the 5
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 95^th
percentile of likely rates of return.
Figure 3. Effect of Annual Contribution Rate on Retirement Savings at Age 65
^$1,⁴⁰⁰^,⁰⁰⁰^s
^$¹^,2¹⁹^,0⁰⁰^a^r
^$1,²⁰⁰^,⁰⁰⁰^o^l^l
^$9⁶¹^,⁰⁰⁰^$1,⁰⁰⁰^,⁰⁰⁰^{04 d}
^$7⁶²^,⁰⁰⁰^$⁸⁰⁰^,⁰⁰⁰ⁱⁿ²⁰
^$⁵⁹⁴^,⁰⁰⁰ⁿ^g^s,
^$⁴⁶⁸^,⁰⁰⁰^$⁶⁰⁰^,⁰⁰⁰^a^vⁱ
^$35^3,⁰⁰⁰^$⁴⁰⁰^,⁰⁰⁰^t^s
^$³⁰¹^,⁰⁰⁰^$21^4,⁰⁰⁰^eⁿ
^$¹⁷⁰^,⁰⁰⁰^$²⁰⁰^,⁰⁰⁰^m
^tⁱ^re
^$-^R^e
⁶^%^8%^10%
^T^o^t^a^l^ann^ua^l^c^oⁿ^t^rⁱ^b^u^tⁱ^on^as^{a p}^e^r^c^ent^age^of^ho^us^eho^l^d^earⁿⁱ^ng^s
⁵^t^h^per^c^e^ntⁱ^l^{e o}^f^r^e^t^u^rⁿ^s⁵⁰^th^p^e^r^c^eⁿ^ti^l^e^o^f^r^e^tu^rⁿ^s^95t^{h p}^e^r^c^en^tⁱ^l^e^of^r^e^t^u^rⁿ^s
^Source:^{Congressional Researc}^h^Service.
^Note:^Ret^{irement savings at}^age^{65 of a}^{married-couple hou}^{sehold with median earnings}^{that co}^nt^{ributes for}³⁰
^{years begin}^{ning at age}³^{5, by a}ⁿⁿ^{ual contribution a}^{nd investme}^{nt r}^{ate of retur}^n.
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 ^th
household with earnings at the 75 percentile would have accumulated $706,000 dollars, while a ^th
low-earning household with earnings at the 25 percentile would have accumulated just
$289,000.

Figure 4. Effect of Household Earnings on Retirement Savings at Age 65
^Source:^{Congressional Researc}^h^Service.
^Note:^Ret^{irement savings at}^age^{65 of a}^{married-couple hou}^{sehold that contrib}^utes^{8% of}^househo^{ld earnings}
^{for 30}^years^beginning^{at age 3}^5,^{by an}^{nual ho}^{usehold earnings}^and^investment^{rate of ret}^ur^n.

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 ²¹
Social Security is not designed to replace all of a worker’s earnings. 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

²¹^M^o^st^w^o^{rkers n}^o^t^c^o^vered^b^y^S^o^ci^al^S^ecu^ri^t^y^{are e}^m^p^l^o^y^e^e^{s o}^f^st^a^t^{e an}^d^l^o^cal^go^vern^m^eⁿ^t^{s t}^h^at^h^a^{ve el}^ect^edⁿ^o^t^t^o
^pa^r^tic^ipa^t^e^.^T^h^e^s^e^g^o^v^e^rⁿ^m^e^nts^a^r^e^r^e^quir^e^{d t}^o^pr^ov^ide^the^m^w^{ith p}^e^ns^ions^{. A}^b^o^u^t^one^-^f^our^t^h^of^s^t^a^t^e^a^{nd l}^o^c^a^l^w^o^r^k^e^r^s
^{are n}^o^tⁱⁿ^S^o^ci^al^S^ecu^ri^t^y^.

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% per year.
To calculate the earnings replacement rate from households’ retirement savings, we converted the
account balance into a stream of income. This was done 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 ²²
life annuity. For example, if a 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 ²³
earnings in the five years before the householder reached age 65. (On the CPS, income is
reported before taxes. The replacement rate here is pre-tax annuity income divided by pre-tax
earnings.)

^{Workers who reac}^{h retirem}^ent^{age with the}^{bulk of t}^{heir retirem}^{ent wealth in a}^retireme^{nt accou}^{nt face t}^{he risk}
^{that if they}^{withdraw money}^{too quickly, they may}^{outlive their as}^{sets. Income an}^{nuities p}^{rovide pr}^{otection against}
^{this risk by}^{pooling the mortality risk of everyone w}^{ho p}^urc^{hases a}ⁿ^an^{nuity. Some ann}^{uity p}^urc^hase^{rs will die before}
^{reaching t}^{heir normal life ex}^pecta^{ncy, which of}^{fsets t}^{he costs to th}^{e insure}^{r of paying}^{income to tho}^{se who live longer}
^{than t}^{heir normal life ex}^pectan^{cy. Despite offering a g}^uara^{nteed in}^{come, no matter how long the}^p^urcha^{ser a}^{nd his or}
^{her ins}^{ured s}^{pouse may}^{live, the market for income a}ⁿⁿ^{uities in th}^{e United States remains r}^{elatively small.}
^{Why are}^{n’t income ann}^{uities more pop}^{ular? One}^reason^{for the}^{slow growth of the a}ⁿⁿ^{uity market}^{is that p}^urc^hasing
^{an an}^{nuity is not without}^{risks. First, ann}^{uities tend to be}^pu^rchase^{d by people w}^{ho, becaus}^{e of good health and fa}^mily
^{history, expect to live longer tha}^{n average. Becau}^{se an}^nuity^pur^ch^{asers tend to}^{have longer-tha}^n-av^{erage life}
^expecta^{ncy, ins}^urers^must^charge^premium^{s that a}^{re high}^{er t}^{han t}^{hey would be if a}ⁿⁿ^{uity p}^urc^hase^{rs were a}^random
^{cross-section of the}^{population. Because an}^{nuities are}^{priced acco}^{rding to the longer life-expec}^tanc^{y of people who}
^{actually buy t}^{hem, a}^{person with}^{average life expe}^ctancy^{may find t}^{hat an a}ⁿⁿ^{uity is not a good deal.}^{Second, the}
^annuity^pu^rchas^{er could die earlier tha}^{n he or}^{she e}^x^p^{ects, in whi}^{ch case t}^{he a}ⁿⁿ^{uity premi}^{um will,}^{in essenc}^{e, have}
^been^{forfeited to the ins}^{urer. Th}^{ere are ma}^{ny ty}^{pes of a}ⁿⁿ^{uities that reduc}^{e this risk, su}^{ch as}^{joint and survivor}

²²^W^e^de^fⁱ^ne^{d pr}^e^-^r^e^tir^em^eⁿ^{t e}^a^rⁿⁱⁿ^g^s^a^s^a^v^e^r^ag^e^hous^e^h^o^l^{d e}^a^rⁿⁱ^ng^s^{in t}^h^e^fⁱ^v^e^y^e^a^r^s^bef^o^r^e^the^ho^us^e^hol^de^r^r^each^ed
^a^g^e^{65. For}^m^o^s^t^ho^us^e^hol^ds^{, e}^a^r^ning^s^pe^a^k^w^h^eⁿ^the^h^ous^e^h^olde^r^is^be^tw^e^eⁿ^{50 a}ⁿ^{d 6}⁰^y^e^a^r^s^{old. A}^l^s^o^{, t}^h^e^aⁿⁿ^u^ity
^v^a^lue^s^a^r^e^ba^s^e^{d on c}^o^nv^e^r^ting^th^e^eⁿ^tir^e^a^c^c^ount^ba^la^nc^e^to^aⁿ^aⁿⁿ^u^ity^{, a}^{nd th}^us^ill^us^tr^a^t^e^the^m^a^xⁱ^m^u^m^r^e^pla^c^e^m^e^nt
^r^a^te^tha^t^c^oul^d^be^a^c^h^ie^v^e^{d f}^r^om^conv^e^r^ting^the^ho^us^e^h^o^l^d’^s^r^e^tir^e^m^eⁿ^{t a}^c^c^ount^to^aⁿ^aⁿ^nui^ty^.
²³^T^h^e^a^nnuity^v^a^lue^s^w^e^re^c^a^l^c^u^la^t^e^{d on}^ht^tp://w^w^w^.i^m^m^e^dia^t^e^a^nnu^itie^s^.^c^o^m^.^{For m}^a^rrie^d^c^ouple^s^{, t}^h^ey^re^pre^s^eⁿ^{t the}
^inc^o^m^e^f^r^o^m^a^lev^e^{l, joint a}^nd¹⁰^0%^s^u^r^v^iv^or^aⁿⁿ^u^ity^f^o^r^a^c^ouple^{in w}^h^ic^{h t}^h^e^hus^ba^nd^is^a^g^e^{65 a}ⁿ^{d the}^wⁱ^f^e^is^a^g^e
^62.^For^uⁿ^m^a^r^rⁱ^e^d^hous^e^h^olds^,^th^ey^r^e^pr^e^s^eⁿ^{t the}^inc^o^m^e^f^r^o^m^a^lev^e^{l, s}ⁱ^ng^le^-^lif^e^a^nnuity^f^o^r^a^m^a^le^hous^e^hol^de^r^w^ho
^is^{65 y}^e^a^r^s^{old. A}ⁿ^aⁿⁿ^u^ity^pur^c^h^a^s^e^d^by^a^w^o^m^a^{n a}^g^e^{65 w}^{ith the}^s^a^m^e^a^c^c^ount^ba^la^nc^e^w^ould^pr^ov^ide^a^s^m^a^lle^r
^a^nnua^{l i}ⁿ^c^o^m^e^b^ecau^{se w}^o^men^{have l}^oⁿ^g^{er l}ⁱ^f^{e e}^x^p^ect^an^ci^{es t}^h^an^men^.

^{annuities and te}^{rm-certain a}ⁿⁿ^{uities, but eac}^{h of t}^{hese gua}^rantee^s^{reduces t}^{he income t}^{hat the}^anⁿ^{uity pays d}^{uring t}^he
^{life of the pu}^rchas^er.
^{Most ann}^{uities offer only limited protection against inflation. A level annuity}^{pays a fi}^{xed monthly a}^{mount for life. The}
^{real value of the a}ⁿⁿ^{uity declines}^{over time as prices}^{rise. Some annuities offer}^{partial inflation protection. Graded}
^{annuities incr}^{ease th}^{e monthly}^pa^yment^{by a fixed}^perce^ntage—^ty^{pically 3%—each y}^{ear, b}^{ut they}^p^{ay a smaller initial}
^{amount and also lose value if infla}^{tion exceeds the}^guara^{nteed pe}^rc^{entage increa}^{se in th}^{e an}^{nuity. Some insure}^rs^now
^{offer inflation-indexed ann}^{uities, but t}^{hey are}^{very e}^x^p^{ensive a}^{nd f}^{ew have}^been^{sold. Another risk}^{in buying}^an
^{annuity is t}^{hat giving u}^p^{a s}^ubstaⁿ^{tial proportion of one’s retireme}^{nt assets to a}ⁿ^insu^{rer co}^{uld leave a house}^{hold with}
^{inadequate re}^sources^{to pay for}^{any large ex}^pe^{nses t}^{hat may arise}^{, such as}^{medical costs or long-term care e}^xpe^nses.
^{Benefits from life an}^{nuities could help ass}^{ure t}^{hat people w}^{ho have}^{most of their retireme}^{nt wealth}^{in a retirement}
^{account do not ex}^hau^{st their a}^s^s^{ets before t}^{hey die and s}^{pend t}^h^e^{ir later years in or}^near^poverty,^{but indu}^{cing more}
^{people to pu}^rchase^{income an}^nui^{ties remains a c}^{hallenge for ma}^ny^insure^rs.
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 with 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 ^th
investment returns over the 20-year period were in the 5 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 ^th
returns over the 20-year period were in the 95 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 ^th
return in the period is significantly above average (at the 95 percentile of returns) or

significantly below average (at the 5^th 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.
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 ^th
95 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 ^th
significantly below average (at the 5 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.

Figure 5. Estimated Range of Earnings Replacement Rates at Age 65 for a Married-
Couple Household with Median Earnings
^Source:^{Congressional Researc}^h^Service.
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 ²⁴
a single-life annuity.
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.
Figure 6. Estimated Retirement Savings at Age 65 or Married Couple and
Unmarried Householders
^Source:^{Congressional Researc}^h^Service.
^Note:^Ret^{irement savings at}^age^{65 of ma}^{rried couples a}^{nd singles}^{with median house}^{hold earnings}^who
^contribute^{8% of}^house^{hold earnings for}^{30 yea}^{rs, by in}^vestme^{nt r}^{ate of retur}^n.

²⁴^Ma^r^rⁱ^e^d^-^c^ou^ple^ho^us^e^hol^ds^ha^v^e^hig^h^e^r^e^a^r^ning^s^thaⁿ^uⁿ^m^a^r^rⁱ^e^d^hous^e^h^olds^m^a^inly^b^ecau^{se t}^h^e^y^ar^{e m}^o^{re l}ⁱ^k^el^y^t^o
^ha^v^e^m^u^ltiple^e^a^r^ne^rs.

Figure 7. Earnings Replacement Rates at Age 65 of Married Couples and Unmarried
Householders
^1.²⁰^t^e
^1.⁰²^r^a
^1.⁰⁰^nt
^0.⁸⁵^e
^0.⁸⁰^e^m
^a^c
^0.⁵⁰^0.⁴²^0.⁶⁰^pl
^0.⁴⁰^re
^0.¹⁹^0.²³^ngs
^0.²⁰^rni
^a
^0.⁰⁰^E
^M^a^rri^ed^Sⁱ^ng^l^e
^M^a^ri^t^a^l^s^t^at^u^s^of^hous^eho^l^der
⁵^t^{h pe}^rc^en^tⁱ^l^e^o^f^ret^u^rns⁵⁰^th^p^e^r^c^eⁿ^ti^l^e^o^f^r^e^tu^rⁿ^s⁹⁵^th^p^e^r^c^eⁿ^ti^l^e^o^f^r^e^tu^rⁿ^s
^Source:^{Congressional Researc}^h^Service.
^Note:^{Earnings re}^placement^rate^{at age 6}⁵^{of married cou}^{ples and}^{singles with median hou}^{sehold earnings w}^ho
^contribute^{8% of}^house^{hold earnings for}^{30 yea}^{rs, by in}^vestme^{nt r}^{ate of retur}^n.
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. ^th^th
These earnings levels are represented by households with earnings at the 75 percentile, 50 ^th
percentile, and 25 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 A-3 and Table A-4.)
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 ^th^th^th
whether the average real rate of return on investment during that period was at the 95, 50, or 5
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 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 ^th
50 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 ^th
investment period were well above average—at the 95 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 ^th
average—at the 5 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 1.4 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.
Table 6. Retirement Savings and Income Replacement Rates, Based on Annual Total
Contributions Equal to 8% of Household Earnings
^{(amounts in 2004 dollars)}
^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^{Household begins saving}^{at age 25 (40 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^balance^2,99^7,00^{0 2,02}^5,00⁰^1,26^7,00^{0 1,88}^0,00^{0 1,18}^4,00⁰^698,⁰⁰⁰
^{Savings/Final 5}^{23.5 27.1}^{30.4 26.8 28.7 31.0}
^{avg. pay}
^Earnings^{1.56 1.80}^{2.02 2.22 2.38 2.57}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^balance^1,25^9,00^{0 844,}⁰⁰⁰^526,⁰⁰^{0 772,}⁰⁰^{0 484,}⁰⁰^{0 285,}⁰⁰⁰
^{Savings/Final 5}^{9.9 11.3}^{12.6 11.0 11.8 12.7}
^{avg. pay}
^Earnings^{0.66 0.75}^{0.84 0.91 0.98 1.05}

^replacement
^rate

^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
⁵^th^{percentile of returns}
^Account^balance^555,⁰⁰^{0 370,}⁰⁰⁰^228,⁰⁰^{0 333,}⁰⁰^{0 208,}⁰⁰^{0 122,}⁰⁰⁰
^{Savings/Final 5}^{4.4 4.9}^{5.5 4.7 5.1 5.4}
^{avg. pay}
^Earnings^{0.29 0.33}^{0.36 0.39 0.43 0.45}
^replacement
^rate
^{Household begins saving}^{at age 35 (30 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^balance^1,44^0,00^{0 961,}⁰⁰⁰^598,⁰⁰^{0 813,}⁰⁰^{0 507,}⁰⁰^{0 297,}⁰⁰⁰
^{Savings/Final 5}^{11.3 12.9}^{14.3 11.6 12.3 13.2}
^{avg. pay}
^Earnings^{0.75 0.85}^{0.95 0.96 1.02 1.09}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^balance^706,⁰⁰^{0 468,}⁰⁰⁰^289,⁰⁰^{0 397,}⁰⁰^{0 247,}⁰⁰^{0 145,}⁰⁰⁰
^{Savings/Final 5}^{5.5 6.3}^{6.9 5.7 6.0 6.4}
^{avg. pay}
^Earnings^{0.37 0.42}^{0.46 0.47 0.50 0.53}
^replacement
^rate
⁵^th^{percentile of returns}
^Account^balance^327,⁰⁰^{0 214,}⁰⁰⁰^130,⁰⁰^{0 182,}⁰⁰^{0 113,}⁰⁰⁰^66,0⁰⁰
^{Savings/Final 5}^{2.6 2.9}^{3.1 2.6 2.7 2.9}
^{avg. pay}
^Earnings^{0.17 0.19}^{0.21 0.22 0.23 0.24}
^replacement
^rate
^{Household begins saving}^{at age 45 (20 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^balance^565,⁰⁰^{0 372,}⁰⁰⁰^224,⁰⁰^{0 310,}⁰⁰^{0 194,}⁰⁰^{0 113,}⁰⁰⁰
^{Savings/Final 5}^{4.4 5.0}^{5.4 4.4 4.7 5.0}
^{avg. pay}
^Earnings^{0.29 0.33}^{0.36 0.37 0.39 0.42}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^balance^326,⁰⁰^{0 213,}⁰⁰⁰^128,⁰⁰^{0 179,}⁰⁰^{0 111,}⁰⁰⁰^65,0⁰⁰

^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^{Savings/Final 5}^{2.6 2.9}^{3.1 2.5 2.7 2.9}
^{avg. pay}
^Earnings^{0.17 0.19}^{0.20 0.21 0.22 0.24}
^replacement
^rate
⁵^th^{percentile of returns}
^Account^balance^185,⁰⁰^{0 119,}⁰⁰⁰^70,0^{00 101,}⁰⁰⁰^62,0⁰⁰^36,0⁰⁰
^{Savings/Final 5}^{1.4 1.6}^{1.7 1.4 1.5 1.6}
^{avg. pay}
^Earnings^{0.10 0.11}^{0.11 0.12 0.13 0.13}
^replacement
^rate
^Source:^{Congressional Researc}^h^Service.

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 ²⁶
directly to a retirement account.
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 credit were made refundable, it would ²⁷
encourage more lower-income workers to save for retirement. Another proposal would disregard
amounts in retirement savings plans for purposes of determining eligibility for certain means-
tested federal aid programs. 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.
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. 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.

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

²⁵^Se^e^C^R^S^R^e^por^{t R}^S²¹⁹⁵^4,^A^u^to^matic^Enr^o^llmeⁿ^{t in 40}¹⁽^k⁾^Plans^,^by^P^a^tric^k^P^u^rc^e^{ll. T}^h^e^PP^A^a^l^so^a^llow^s^ta^x^p^a^y^e^r^s
^{to i}ⁿ^s^t^r^u^c^t^t^h^e^I^R^{S t}^o^dir^e^c^t^a^p^o^r^t^ion^of^theⁱ^rⁱⁿ^c^o^m^e^ta^x^r^e^f^{und int}^o^aⁿ^I^R^A^.
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low annual contribution equal to 6% 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% 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 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.

Table A-1. Household Earnings in 2004, by Age and Marital Status of Householder
and Percentile Rank of Earnings
^{Married Householder}^Unmar^{ried Householder}
^Age⁷⁵^th^percentile⁵⁰^th^percentile²⁵^th^percentile⁷⁵^th^percentile⁵⁰^th^percentile²⁵^th^percentile
²⁵^$60,5⁰⁰^$41,0^{00 $27,2}^{71 $52,0}^{00 $33,0}⁰⁰^$19,2⁰⁰
²⁶^63,4⁰⁰^45,6^{00 30,0}^{00 52,7}^{84 35,0}⁰⁰^20,0⁰⁰
²⁷^73,0⁰⁰^50,0^{00 32,0}^{00 56,0}^{00 35,0}⁰⁰^20,0⁰⁰
²⁸^75,6⁰⁰^54,0^{00 34,1}^{50 55,1}^{00 36,0}⁰⁰^20,0⁰⁰
²⁹^78,0⁰⁰^52,0^{00 34,0}^{00 55,0}^{00 35,0}⁰⁰^22,9⁰⁰
³⁰^82,0⁰⁰^58,2^{00 37,5}^{00 55,0}^{00 35,0}⁰⁰^22,0⁰⁰
³¹^86,0⁰⁰^55,0^{00 34,0}^{00 55,0}^{00 34,0}⁰⁰^20,0⁰⁰
³²^87,0⁰⁰^59,5^{00 35,0}^{00 54,0}^{00 35,0}⁰⁰^20,0⁰⁰
³³^90,0⁰⁰^60,0^{00 37,0}^{00 54,0}^{00 32,0}⁰⁰^20,0⁰⁰
³⁴^90,0⁰⁰^60,8^{00 38,0}^{00 55,0}^{00 35,0}⁰⁰^21,0⁰⁰
³⁵^95,0⁰⁰^63,5^{00 42,0}^{00 55,0}^{00 35,0}⁰⁰^20,0⁰⁰
³⁶^95,0⁰⁰^66,0^{00 42,0}^{00 60,0}^{00 36,0}⁰⁰^22,0⁰⁰
³⁷^95,4⁰⁰^65,0^{00 39,4}^{40 56,0}^{00 35,0}⁰⁰^20,0⁰⁰
³⁸^100,⁰⁰⁰^67,2^{00 42,0}^{00 58,8}^{00 37,0}⁰⁰^20,0⁰⁰
³⁹^100,⁰⁰⁰^65,0^{00 42,0}^{00 56,8}^{80 34,1}⁸⁷^20,0⁰⁰
⁴⁰^100,⁰⁰⁰^70,0^{00 45,4}^{00 60,0}^{00 37,0}⁰⁰^22,5⁰⁰
⁴¹^97,0⁰⁰^65,0^{00 42,0}^{00 55,0}^{00 36,0}⁰⁰^22,0⁰⁰
⁴²^102,⁹⁵⁰^68,9^{90 42,0}^{00 55,9}^{60 36,0}⁰⁰^22,0⁰⁰
⁴³^105,⁰⁰⁰^69,2^{10 44,0}^{00 55,0}^{00 34,9}⁰⁰^21,0⁰⁰
⁴⁴^109,⁰⁰⁰^73,0^{00 45,0}^{00 58,0}^{00 35,0}⁰⁰^20,0⁰⁰
⁴⁵^109,⁵⁰⁰^71,2^{00 42,4}^{00 57,0}^{00 37,0}⁰⁰^22,0⁰⁰
⁴⁶^101,⁸⁰⁰^70,0^{00 44,0}^{00 60,0}^{00 40,0}⁰⁰^23,2¹⁵
⁴⁷^108,⁹⁴⁴^74,0^{00 47,0}^{00 61,0}^{00 40,0}⁰⁰^21,0⁰⁰
⁴⁸^111,⁰⁰⁰^73,0^{00 45,0}^{00 63,0}^{00 37,0}⁰⁰^22,0⁰⁰
⁴⁹^105,⁰⁰⁰^73,9^{00 46,2}^{00 56,0}^{00 36,0}⁰⁰^21,0⁰⁰
⁵⁰^109,⁴⁰⁰^75,0^{00 48,0}^{00 60,0}^{00 35,0}⁰⁰^20,0⁰⁰
⁵¹^105,⁰⁰⁰^70,0^{00 41,7}^{44 55,7}^{00 37,0}⁰⁰^21,8⁶⁰
⁵²^105,⁰⁰⁰^73,0^{00 44,9}^{20 64,0}^{00 38,0}⁰⁰^23,0⁰⁰
⁵³^109,⁰⁰⁰^72,8^{00 44,9}^{30 62,0}^{00 37,0}⁰⁰^24,0⁰⁰
⁵⁴^112,⁹⁰⁰^73,5^{00 42,0}^{00 58,0}^{00 35,0}⁰⁰^19,0⁰⁰
⁵⁵^103,⁰⁰⁰^69,0^{00 40,0}^{00 54,0}^{00 34,0}⁰⁰^19,0⁰⁰

^{Married Householder}^Unmar^{ried Householder}
^Age⁷⁵^th^percentile⁵⁰^th^percentile²⁵^th^percentile⁷⁵^th^percentile⁵⁰^th^percentile²⁵^th^percentile
⁵⁶^100,⁰⁰⁰^65,0^{00 37,0}^{00 52,0}^{00 35,0}⁰⁰^23,0⁰⁰
⁵⁷^105,¹¹⁸^66,0^{00 40,0}^{00 56,0}^{00 36,0}⁰⁰^20,8⁰⁰
⁵⁸^102,⁰⁰⁰^63,9^{16 32,0}^{00 56,0}^{00 32,6}⁵⁷^20,0⁰⁰
⁵⁹^100,⁰⁰⁰^58,4^{88 36,0}^{00 51,6}^{00 32,3}⁰⁰^20,0⁰⁰
⁶⁰^90,0⁰⁰^56,5^{00 31,0}^{00 52,5}^{00 32,0}⁰⁰^19,0⁰⁰
⁶¹^94,0⁰⁰^55,0^{00 33,0}^{00 44,0}^{00 28,0}⁰⁰^17,0⁰⁰
⁶²^88,0⁰⁰^55,0^{00 28,0}^{00 50,0}^{00 28,0}⁰⁰^14,2⁷²
⁶³^85,0⁰⁰^44,0^{00 26,0}^{00 46,0}^{00 25,0}⁰⁰^13,0⁰⁰
⁶⁴^73,0⁰⁰^41,9^{08 22,8}^{33 44,0}^{00 26,0}⁰⁰^12,8⁰⁰
^Source:^{Congressional Researc}^h^{Service analysis of the}^Marc^{h 2}⁰⁰⁵^{Current Population Survey}^.
Table A-2. Annual Total Return on Stocks and Bonds and Annual Rate of Change in
the Consumer Price Index, 1926-2005
^Year^{S&P 50}⁰^AAA^Bonds^{CPI-U Year}^S&P⁵⁰⁰^AAA^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%

^{Year S&P}⁵⁰⁰^AAA^Bonds^{CPI-U Year}^S&P⁵⁰⁰^AAA^Bonds^CPI-U
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 ave}^{rage, 19}²⁶^{to 20}^05:^10.0%^6.3%^3.0%
^{Standard deviation:}^19.7%^7.1%^4.3%
^Source:^{Congressional Researc}^h^{Service, compiled from various sources.}
Table A-3. Retirement Savings and Income Replacement Rates, Based on Annual
Total Contributions Equal to 6% of Household Earnings
^{(amounts in 2004 dollars)}
^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^{Household begins saving}^{at age 25 (40 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^$2,14^1,00⁰^$1,44⁷⁰^{00 $91}^0,00⁰^$1,35^7,00⁰^$85^6,00^{0 $50}^3,00⁰
^balance
^{Savings/Final 5}^{16.8 19.4 21.8}^19.4^{20.8 22.4}

^{avg. pay}

^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^Earnings^{1.12 1.29 1.45}^1.61^{1.72 1.85}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^932,⁰⁰^{0 625,}⁰⁰^{0 389,}⁰⁰⁰^569,⁰⁰⁰^357,⁰⁰^{0 210,}⁰⁰⁰
^balance
^{Savings/Final 5}^{7.3 8.4 9.3}^8.1^{8.7 9.3}
^{avg. pay}
^Earnings^{0.49 0.56 0.62}^0.67^{0.72 0.77}
^replacement
^rate
⁵^th^{percentile of returns}
^Account^426,⁰⁰^{0 282,}⁰⁰^{0 174,}⁰⁰⁰^253,⁰⁰⁰^159,⁰⁰⁰^93,0⁰⁰
^balance
^{Savings/Final 5}^{3.3 3.8 4.2}^3.6^{3.8 4.1}
^{avg. pay}
^Earnings^{0.22 0.25 0.28}^0.30^{0.32 0.34}
^replacement
^rate
^{Household begins saving}^{at age 35 (30 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^1,08^4,00^{0 726,}⁰⁰^{0 453,}⁰⁰⁰^617,⁰⁰⁰^384,⁰⁰^{0 225,}⁰⁰⁰
^balance
^{Savings/Final 5}^8.5^9.7^{10.9 8.8 9.3}^10.0
^{avg. pay}
^Earnings^{0.57 0.65 0.72}^0.73^{0.77 0.83}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^533,⁰⁰^{0 353,}⁰⁰^{0 218,}⁰⁰⁰^299,⁰⁰⁰^186,⁰⁰^{0 109,}⁰⁰⁰
^balance
^{Savings/Final 5}^{4.2 4.7 5.2}^4.3^{4.5 4.8}
^{avg. pay}
^Earnings^{0.28 0.31 0.35}^0.35^{0.37 0.40}
^replacement
^rate
⁵^th^{percentile of returns}
^Account^260,⁰⁰^{0 170,}⁰⁰^{0 104,}⁰⁰⁰^144,⁰⁰⁰^90,0⁰⁰^52,0⁰⁰
^balance
^{Savings/Final 5}^{2.0 2.3 2.5}^2.1^{2.2 2.3}

^{avg. pay}

^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^Earnings^{0.14 0.15 0.17}^0.17^{0.18 0.19}
^replacement
^rate
^{Household begins saving}^{at age 45 (20 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^458,⁰⁰^{0 301,}⁰⁰^{0 181,}⁰⁰⁰^251,⁰⁰⁰^157,⁰⁰⁰^91,0⁰⁰
^balance
^{Savings/Final 5}^{3.6 4.0 4.3}^3.6^{3.8 4.1}
^{avg. pay}
^Earnings^{0.24 0.27 0.29}^0.30^{0.32 0.34}
^replacement
^rate
⁵⁰^th^percentil^{e of returns}
^Account^244,⁰⁰⁰^159,⁰⁰^{0 95,0}⁰⁰^134,⁰⁰⁰^83,0^{00 48,0}⁰⁰
^balance
^{Savings/Final 5}^{1.9 2.1 2.3}^1.9^{2.0 2.2}
^{avg. pay}
^Earnings^{0.13 0.14 0.15}^0.16^{0.17 0.18}
^replacement
^rate
⁵^th^{percentile of returns}
^Account^144,⁰⁰^{0 93,0}^{00 55,0}⁰⁰^79,0⁰⁰^49,0^{00 28,0}⁰⁰
^balance
^{Savings/Final 5}^{1.1 1.2 1.3}^1.1^{1.2 1.3}
^{avg. pay}
^Earnings^{0.07 0.08 0.09}^0.09^{0.10 0.11}
^replacement
^rate
^Source:^{Congressional Researc}^h^Service.
Table A-4. Retirement Savings and Income Replacement Rates, Based on Annual
Total Contributions Equal to 10% of Household Earnings
^{(amounts in 2004 dollars)}
^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
^{Household begins saving}^{at age 25 (40 y}^{ears of saving)}

^{Married househ}^older^Unmar^{ried househ}^older
^{Annual househ}^old^earnings^{Annual househ}^old^earnings
⁷⁵^th⁵⁰^th²⁵^th⁷⁵^th⁵⁰^th²⁵^th
^percentile^percentile^percentile^percentile^percentile^percentile
⁹⁵^th^percentil^{e of returns}
^Account^balance^3,51^6,00^{0 2,38}^1,00⁰^1,50^1,00^{0 2,22}^3,00⁰^1,40^0,00⁰^825,⁰⁰⁰
^{Savings/Final 5 avg.}^{27.6 31.9}^{36.0 31.7}^{34.0 36.7}
^pay
^Earnings^{1.83 2.12}^{2.39 2.11}^{2.82 3.04}
^replacement^rate
⁵⁰^th^percentil^{e of returns}
^Account^balance^1,54^2,00⁰^1,03^6,00⁰^645,⁰⁰^{0 960,}⁰⁰⁰^603,⁰⁰^{0 354,}⁰⁰⁰
^{Savings/Final 5 avg.}^{12.1 13.9}^{15.5 13.7}^{14.6 15.7}
^pay
^Earnings^{0.80 0.92}^{1.03 1.14}^{1.21 1.31}
^replacement^rate
⁵^th^{percentile of returns}
^Account^balance^672,⁰⁰^{0 445,}⁰⁰⁰^274,⁰⁰^{0 402,}⁰⁰⁰^251,⁰⁰^{0 148,}⁰⁰⁰
^{Savings/Final 5 avg.}^{5.3 6.0}^{6.6 5.7}^{6.1 6.6}
^pay
^Earnings^{0.35 0.40}^{0.44 0.48}^{0.51 0.54}
^replacement^rate
^{Household begins saving}^{at age 35 (30 y}^{ears of saving)}
⁹⁵^th^percentil^{e of returns}
^Account^balance^1,82^2,00^{0 1,21}^9,00⁰^761,⁰⁰^{0 1,03}^3,00⁰^644,⁰⁰⁰^377,⁰⁰⁰
^{Savings/Final 5 avg.}^{14.3 16.3}^{18.3 14.7}^{15.6 16.7}
^pay
^Earnings^{0.95 1.08}^{1.21 1.22}^{1.30 1.39}
^replacement^rate
⁵⁰^th^percentil^{e of returns}
^Account^balance^897,⁰⁰^{0 594,}⁰⁰⁰^365,⁰⁰^{0 502,}⁰⁰⁰^312,⁰⁰^{0 183,}⁰⁰⁰
^{Savings/Final 5 avg.}^{7.0 8.0}^{8.8 7.2}^{7.6 8.1}
^pay
^Earnings^{0.47 0.53}^{0.58 0.59}^{0.63 0.67}
^replacement^rate
⁵^th^{percentile of returns}
^Account^balance^459,⁰⁰^{0 301,}⁰⁰⁰^184,⁰⁰^{0 256,}⁰⁰⁰^159,⁰⁰⁰^93,0⁰⁰
^{Savings/Final 5 avg.}^{3.6 4.0}^{4.4 3.7}^{3.9 4.1}
^pay
^Earnings^{0.24 0.27}^{0.29 0.30}^{0.32 0.34}
^replacement^rate
^{Household begins saving}^{at age 45 (20 y}^{ears of saving)}