Russell Research Shows Ninety Percent of Retirement Income Is From
Investment Returns, Not Savings/Contributions
Almost Two Thirds of Investment Returns Are Earned During, Not Prior to,
Retirement
TACOMA, Wash. (Business Wire EON) May 27, 2008 --
Russell Investments has released research to its clients that shows that
investment returns generated by 401(k) savings during an individual’s
retirement play the critical role in providing retirement income. This
challenges the conventional belief that retirement income is derived
predominantly from savings and returns accumulated during a participant’s
working years.
These findings build off significant research in the defined benefit
space conducted by Don Ezra, director, Investment Strategy, almost two
decades ago. In this earlier research, “A
Model of Pension Fund Growth” (1989), Ezra
modeled DB plan growth and found that “for any
one plan member, the largest part of the investment return…accrues
during the payout stage.”
Dubbed the 10/30/60 Rule by authors Matt Smith, managing director,
Retirement Services and Bob Collie, director, Investment Strategy, this
new research continues Russell’s efforts to
leverage its decades of pension expertise for the benefit of the
individual investor. In this case, the findings show that in a defined
contribution (DC) context, the plan benefits that a participant receives
in retirement can be broken out as:
-
10% of each retirement income dollar consists of contributions made to
the DC plan while working
-
30% is made up of investment returns generated prior to retirement
-
60% is made up of investment returns generated after retirement
The basic 10/30/60 pattern proved to be stable even with a range of
assumptions. As part of its research, Russell altered several input
assumptions – such as the retirement age, the
age when saving begins and age of death – and
found that only lowering the expected post-retirement return would
significantly change the 10/30/60 rule.
“It would be wrong to conclude that
contribution level is not important. Indeed, without contributions there
can be no investment return,” said Smith. “However,
with roughly 90% of distributions being generated by investment
earnings, sound investment programs are critical if DC plans are to be
effective in meeting goals for financial security in retirement.
“The current turmoil in the markets can cause
individual investors to panic and focus only on the short-term. This
research underpins the importance of a long-term, diversified investment
approach as the best way to maximize the chance of successfully meeting
retirement income goals,” said Smith. “Plan
sponsors can do their part by diligently reviewing their plan design to
ensure best practices when it comes to investment line-ups, including
the plan’s default options.”
For more information on Russell’s Retirement
Research, please visit www.russell.com.
About Russell
Russell Investments provides strategic advice, world-class
implementation, state-of-the-art performance benchmarks and a range of
institutional-quality investment products. With nearly $213 billion in
assets under management (as of 3/31/08), Russell serves individual,
institutional and advisor clients in more than 40 countries. Russell
provides access to some of the world's best money managers. It helps
investors put this access to work in corporate defined benefit and
defined contribution plans, and in the life savings of individual
investors.
Founded in 1936, Russell is a subsidiary of Northwestern Mutual Life
Insurance Company and headquartered in Tacoma, Wash. Russell has
principal offices in Amsterdam, Auckland, Johannesburg, London,
Melbourne, New York, Paris, San Francisco, Singapore, Sydney, Tokyo and
Toronto.
RFD# 0469
Copyright © Russell Investments 2001-2008.
All rights reserved.
Russell Investment Group is a Washington, USA corporation, which
operates through subsidiaries worldwide, including Russell Investments,
and is a subsidiary of The Northwestern Mutual Life Insurance Company.
Russell Fund Distributors, Inc. member FINRA, part of Russell
Investments.
Investments are subject to market risk and may lose value.
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