the million dollar retirement

7/31/2019 The Million Dollar Retirement

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The Million Dollar Retirement


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Abstract

Purpose

The purpose of this research paper is to conduct simulations to determine how difficult orprobable it is for the average worker of 32 and 47 to reach a million dollar retirement at age

67. Ignoring the fact that millions of working Americans do not participate in an individualretirement account of any kind, I hypothesize that it will be difficult for those workers that do tosave enough money for their retirement based on the target retirement account balance. Thisresearch analysis is important most people do not think too long term, especially for retirementand the ability to facilitate simple software or add-in tools to help in this analysis could givemore workers the knowledge to make somewhat better decisions for their retirement savings.

Design/Methodology/Approach

Given the U.S. emphasis on education and the fact that millions of working Americansare going back to school to finish or further their educations, I picked workers aged 32 and 47 tobe representative of those who participate in 401ks and will still be in the workforce at least 20

years. The younger age is based on the expectation that government provided retirement benefitswill continue to be lowered and delayed and, therefore, it is more important than ever foryounger workers to set aside enough funds for their retirement. This analysis uses financialmodels and simulation to assess how likely it is that these two worker age groups will be able toachieve a predetermined retirement account target. The data was evaluated through simulationsprovided by use of the Crystal Ball software application for excel.

Findings

The research found that for the 32 year-old worker with median income for that agegroup and a starting balance equal to the average for that age group; that the mean value of theretirement account at age 67 fell slightly short of the $1 million target balance. The researchfound that for the 47 year-old worker with median income for that age group and a startingbalance equal to the average for that age group; that the mean value of the retirement account atage 67 fell significantly short of the $1 million target balance. The results support the assertionthat it is better to start saving at an earlier age than to try to make it up later.

Research Limitations/Implications

This research was limited because it focused solely on retirement account returns basedon an investment in the S&P 500 and based the probabilistic returns on that index. The financialmodels were simple end of the year models that did not account for the typical biweeklycontributions to retirement accounts. There was no asset diversification or changing portfolioallocations over time, as is normally suggested as workers get closer to retirement. It ignoresthat that, income, contribution percentages and matching rates varies dramatically amongworkers in those age groups.

Value

The value of this research is that it visually and numerically clarifies the possible long-term impact of financial decisions made now and highlights the need to make this type ofanalysis more available and accessible for the average worker to help them make better financialretirement decisions.


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Introduction

In 1974, the United States Congress passed the Employee Retirement Income SecurityAct that included a paragraph 401k (DoL, 2012). That paragraph provides the legal basis forwhat are now known as 401ks, a type of individual retirement account (IRAs) that has now been

in use for just over 30 years (Burke, 2012). The 401k had provisions that were supposed to helpemployees improve their standard of living after retirement and to complement whatever theywould receive from Social Security, especially with the company matching provision.

The 401k is a defined contribution plan. Whereas, pensions, which have lost popularitydue to their legacy costs, are defined benefit plans. The reality of the 401k and other IRAs is thatonly about a third of working adults have such an account (EBRI, 2011). Ignoring the fact thatthe majority of Americans will not benefit from 401ks, it has been tossed about that theaverage American retiree should have about a million dollars in their retirement accounts whenthey retire, if they are only going to take 4% of their balance as annual income. Recent numberspublished by Fidelity Investments suggests that the average IRA holder contributes 8% of theirincome to their retirement accounts (Fidelity Investments, 2011). It has also been reported that

the average 401k balance for all age groups is approximately $75,000 (Mink, 2011).This paper will take the average 401k participant for two different age groups withmedian incomes for those groups and run a number of simulations to determine the probability ofthe average 401k participant reaching the million dollars that personal finance pundits suggestthat retirees will need. It will be a simplified annual contribution model rather than biweeklycontributions that will vary annual income increases, inflation and market return until the earlySocial Security retirement age of 65.

The Research Question

In many countries and societies, it is expected that your family will care for you in yourold age. While that certainly occurs in the United States, you are expected to provide foryourself in old age. This means you work until you are physically unable to do so, live inpoverty or make plans to have financial resources available at retirement. Most of the researchassociated with the financial aspect of retirement planning deals with the differences in practicesbetween demographic groups, comparisons to other countries retirement policies and systems orthe behavioral aspects of U.S. consumers.

The U.S. is heavily focused on its citizens getting some kind of education, whether it isvocational or academic. However, the country, as a whole, does a horrible job of education itscitizens in the wise use of money and how to plan and prepare for retirement. While there areobviously some cultural and economic drivers behind this benign ignorance of financial planningeducation, this paper will focus primarily on what it necessary to have a sizable nest egg orretirement account balance at the current full retirement age for future Social Security recipientsof 67 years. Most importantly, what is the probability of the average 401k plan participantreaching a million dollars in assets by the age of 67?

This research paper will briefly discuss the overall retirement environment that we arecurrently and then present the results of the financial models employed to make predictions aboutwhere an average 401k participant expect their retirement account to be when they retire.


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Defined Benefit Plans versus Defined Contribution Plans

There are two basic types of retirement plans for employees. These vary in terms of howmuch authority they give the employee to determine where their money will be invested. In adefined contributions plan, the employee is provided a list of available mutual funds into which

their money can be invested (Landier & Nair, 2008). However, the employee has authority todetermine how much of the employees wages will be invested into the fund during the term ofemployment.

In contrast, a defined benefits plan establishes a pension-like system. The employerdetermines a final annual payment that the employee will receive after retirement (Landier &Nair, 2008). The employer has further authority to distribute money to the private pension fundthat is responsible for investing. Of course, the goal of this fund is to ensure that risk is properlymanaged so that the pension has available funds for retired employees despite fluctuations in themarket.

While pension systems were quite common in the past, they have declined significantlyas the result of various social, political and economic trends. For example, most employees do

not spend their entire careers at one employer, and this has removed the pension as a standardbenefit. In addition, many employers have responded to calls to lower costs by eliminatingpension benefits. One of the few exceptions where pensions still exist is among union andgovernment employers. The Employee Benefit Research Institute reports:

Defined benefit plans have declined (reflecting pressure on defined benefit plansponsors to control costs and funding volatility, in addition to increased regulatoryburdens), while defined contribution (401(k)-type) plans have grown (Landier &Nair, 2008, p. 23).

For example, in 1979, 62 percent of employers offered defined benefit (pension) plans(Landier & Nair, 2008). By 2005, only 10 percent of employers offered such plans. Meanwhile,during the same period, defined contribution plans increased from 16 percent to 63 percent of theretirement plans offered by employers.

Political trends in the United States since the 1980s have favored the emergence of401(k)s rather than pensions. Pro-business political interests in America have cultivated the ideathat individual investment in the stock market through mutual funds is an acceptable level of riskfor employee retirement plans (Ghilarducci, 2008). These same political interests want to lowerbusiness costs, and pensions formerly represented a significant cost for businesses. Indeed, thefailure of the American automobile industry is attributed in part to the significant pension costsfor union employees (Bunkley, 2012).

The emergence of defined contribution plans and the 401(k) thus represent social,economic and political trends in American society over the past 30 years. Economic trends, suchas the decline of manufacturing and the emergence of a more professionalized workforce, havedecreased the percentage of firms with union employees and the length of time an employeeworks at a firm. Political trends have favored lowering costs for businesses and encouragingindividual investment. As a result of these economic and political trends, a social norm in favorof defined contribution plans like 401(k)s has emerged. These trends have firmly establisheddefined contribution plans as the primary retirement plan offered by employers in the UnitedStates.


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There are critics of the trends that have led to the replacement of defined benefits(pensions) plans with defined contribution (401(k)) plans. Ghilarducci (2008) notes the fact thatpension plans guarantee a retirement benefit to the employee, whereas defined contribution plansonly offer the potential for returns. In addition, Ghilarducci (2008) and other critics claim thatpension managers are more competent at managing risk and providing returns than individual

investors.Even mutual funds vary considerably in their types and carry levels of risk that averageemployees are unable to properly identify and manage, critics say. Meanwhile, businesses canplace the greater burden of risk on employees through defined contributions. However, thesecriticisms are unlikely to change the overwhelming trend away from defined benefits towarddefined contributions.

The 401(k)

The Employee Retirement Income Security Act (ERISA) of 1974 established 401(k)s asan alternative to defined benefits plans (pensions) (Jeszeck, 2011). ERISA was intended to

ensure that employers engaged in responsible management of both pensions and 401(k) plans.The term 401(k) prefers to the paragraph in the tax code that allows employers to providedefined contribution plans rather than pensions for their employees. The goal of the 401(k)provision in ERISA was to diminish costs for employers while allowing employees to potentiallymaximize their retirement income beyond what could be provided in a traditional definedbenefits plan.

The 401(k) plan allows employees to make contributions to their retirement plan, eitherpost-tax or pre-tax (Jeszeck, 2011). Earnings are tax-deferred, and this results in compoundedinterest that is much greater than would occur if earnings were taxed annually. To avoid taxationand other penalties, 401(k)s cannot be withdrawn until the age of 59 years, which is actuallymore than five years prior to receipt of Social Security retirement funds for most Americancitizens.

There are other tax benefits for 401(k)s if contributions are made pre-tax (Jeszeck, 2011).All income made for pre-tax contributions is spared from federal income tax. The money youcontribute to a 401(k) thus lowers your gross income and in turn your taxable income. Moststates also offer tax relief on pre-tax contributions to 401(k)s, though this is not uniform acrossAmerica.

Penalties on early withdrawal are severe. In addition to paying federal taxes on capitalgains, assuming your investments provided returns, and the contributions from your income, a 10percent early-withdrawal penalty is also incurred (Jeszeck, 2011). However, there are exceptionsto this penalty. For example, early withdrawals from a 401(k) can be made in cases of theemployees death, disability, for medical expenses and if the employee leaves the firm afterreaching age 55. In some cases, employees can take loans against their 401(k)s without incurringpenalties assuming the loan terms are met (Jeszeck, 2011). However, these terms are relativelystrict.

In some cases, employers offer matching contributions to the employees contribution toa 401(k) (IRS, 2012). These matching contributions are considered a benefit intended to attractemployees to a firm. In fact, most employers do not offer this benefit (Jeszeck, 2011). Since thepoint of a 401(k) is reduce employer costs for retirement benefits, it makes sense that few firmswould offer a matching contribution.


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The maximum contributions that can be made by employees to their 401(k) was $16,500

in 2011 and $17,000 in 2012 (IRS, 2012). Increases in the maximum contribution are expected torise as a result of cost of living increases. There are ways for employees age 50 or over toincrease their contributions beyond these limits. Elective deferral contributions might be allowed

based on what the employee contributed in the past. The elective deferral limit in 2012 will be$5,500.

401(k) Participation in the U.S.

The Bureau of Labor Statistics published its last review of 401(k) participation in 2008,before the economic downturn, which placed a significant burden on some employees who wereforced to withdraw early from their 401(k)s for living expenses (Bunkley, 2012). Nevertheless,the Bureau of Labor Statistics provide the most recent data on 401(k) participation in the UnitedStates workforce.

Nearly 50 million American workers participate in a 401(k) plan (Jeszeck, 2011). Sixty-

five percent of eligible workers are believed to participate in 401(k) plans (Bassett, Fleming &Rodrigues, 2012). Although specific figures on contributions are not known, since individualcontributions are private under the law, it is believed that most American workers do notcontribute the full amount allowed under the law, which in 2012 is $17,000. Indeed, studies havefound that most Americans fail to contribute in amounts necessary to adequately fund aretirement that provides a desired quality of life.

Studies have found that participation increases as a result of various demographic factors(Bassett, Fleming & Rodrigues, 2012). For example, participation increases as income, age, jobtenure and education increases. In addition, the availability of matching contributions fromemployers also increases participation, yet studies have found that participation does not growwith the rate of matching (Bassett, Fleming & Rodrigues, 2012, p. 1). In other words, if theemployer increases how much of the employee contribution is matched, a corresponding increasein participation is not observed.

Matching contributions from employers is relatively rare. Only about one-third ofemployers who offer 401(k) plans offer matching contributions (Bassett, Fleming & Rodrigues,2012). This makes sense given the history of trends that gave rise to the 401(k) plan. The interestof businesses to lower their costs of providing retirement benefits was paramount, and thus itmakes sense that most businesses do not provide matching contributions. Studies have found thatthose firms that do provide matching contributions are most likely to suffer from a laborshortage, usually of highly skilled professionals. In these circumstances, matching contributionsof company stockare often provided for an employees 401(k) contribution (Bassett, Fleming &Rodrigues, 2012).

Encouraging greater participation in 401(k) plans has been a goal of the U.S. governmentfor several reasons. First, Social Security income provides only a bare minimum necessary tomeet basic needs, and most Americans will find this income inadequate to maintain the quality oflife they desire (Bassett, Fleming & Rodrigues, 2012). In addition, the government has aninterest in encouraging individual investment in the market, which is considered beneficial formarket growth and stability.


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Lastly, the government anticipates that large numbers of retirees with inadequateretirement savings will place a significant drain on other public resources or will lobby forincreased Social Security income (Bassett, Fleming & Rodrigues, 2012). Social Security reservesare expected to be placed under a significant burden in coming decades as the number of retireesin relation to the number of workers increases. Some claim that Social Security could become

insolvent for future generations.

How Much Do You Need to Retire?

The amount of adequate retirement savings needed by average American is highlysubjective. There are multiple factors that must be determined when deciding how muchretirement savings are necessary (Bassett, Fleming & Rodrigues, 2012). These factors includethe cost of living in the area where the retiree wants to reside, the type of lifestyle the retireedesires, and the amount of medical costs expected to exceed what is provided by Medicare andMedicaid (Savage, 2009). In addition, home ownership and real estate values greatly determinehow much retirement savings will be necessary, since many Americans rely on rising home

values as a potential retirement fund.For example, a retiree in Manhattan is likely to have much greater housing costs than aretiree in the rural American South. Likewise, the lifestyle for a retiree in Manhattan is likely tobe more costly than the lifestyle for a retiree in a rural area of the country. A retiree with ahistory of medical problems that precedes retirement is likely to have greater medical costs thatexceed what can be provided by Medicare and Medicaid.

However, if the retiree in Manhattan owns property in New York City, and real estatevalues are on an upswing, this retiree will have significant retirement proceeds, in addition tosavings and investments if selling is an option. This retirees real estate holdings will beparticularly valuable if they are intended to finance property in a rural or otherwise lessexpensive area of the country. In sum, how much one needs to retire depends on a variety ofcomplex and interactive personal, demographic and geographic factors, many of which areuncertain or uncontrollable (Savage, 2009).

In addition, financial-planning experts note the fact that lifestyle and medical science aresignificantly adding to the lifespan of Americans (Savage, 2009). The average Americans livenearly 20 years longer today than they did in the 1930s, when the age of 65 was established forSocial Security benefits. It should be noted that Social Security benefits were initially providedat an age when most Americans were likely to die. Today, Social Security age marks thebeginning of a prolonged retirement that could last two decades or more. As a result, it isparamount for Americans to consider the fact that they could live well into their eighties or eventheir nineties. Not only must Americans save more for retirement, but their retirement savingsand investments must provide reliable and consistent returns to account for increased lifespan(Savage, 2009).

Average 401(k) account balances fluctuate significantly as a result of fluctuations in thestock market. Although figures for all 401(k)s in the United States are not available, figures forone of the largest mutual-fund companies in the U.S. Fidelity, are reported annually. At the endof 2011, the year-end average for participants in 401(k)s managed by Fidelity was nearly$70,000 (Jewell, 2012). The average annual contribution was less than $6,000, whichrepresented an average 8 percent of the employees income. In 2009, the stock-market downturncaused average balances to fall to $46,000 in Fidelity accounts (Jewell, 2012). In the past several


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argue that 401ks pose a destabilizing influence on the economy. The basis for their assertion isthat if the sources for income during an economic downtown are primarily current andinvestment income, then 401ks can have a destabilizing effect because many retirees have nocurrent income and their investment income or proceeds from their retirements account also dropand that Social Security has a counter-cyclical effect during economic downturns and therefore

helps stabilize the economy. This research article could be important in that it may supportresearch into what an appropriate retirement portfolio should consist of, although fixed income isgenerally recommended to protect investment capital and to produce ongoing income.

Stephen Balkams (2008) research into an analysis of baby boomer preparations forretirement suggests a complementary approach to retirement planning that would be useful forindividuals looking at their own retirement planning situation. What Mr. Balkam does in hisarticle is to use multivariate regression analysis to determine what factors play the greatest rolein worker preparedness for retirement. His research presents interesting avenues for determininghow well someone is saving for their retirement by taking other factors into account that can beidentified or measured. Some of the most interesting results from his study are that gender,

education level and having a financial advisor do not have statistically significant impact onpreparedness. The single most important factor is simply having a financial plan, even if it isimportant.

Retirement Account Financial Model

This research does not attempt to account for all of the qualitative factors that influenceU.S. savings patterns, such as the promotion of consumer credit, cost of living growth versusgrowth in wages, family lessons,personal philosophies on moneys role in ones life, etc. It alsodoesnt address the lack of personal financial management educations role in financial decision-making. Finally, the model does not account for the possibility that long-term market returnsmay be lower than in the past and assumes a 100% weighting in a S&P 500 index, excludingother public and private equity opportunities, plus funds in other asset classes, such as REITs andfixed income. However, it does highlight the largest problem for 401k plan participantsthedifficulty of setting funds aside on a consistent basis for ones retirement. After the modelresults are presented, a brief suggestion for future research ideas for addressing this issue will bediscussed.

Model Variables

This financial model has five key variables that help determine the retirement accountbalance, two of which have probability distributions applied to them pay increase/inflation,annual salary, employee contribution, employer matching, and annual return. The two variablesthat have probability distributions applied to them are pay increase/inflation and annual return.The next years salary is determined by applying a varying pay increase (triangle distribution),which is also a proxy for inflation, to the previous years annual salary. The end of yearemployee contribution and employer matching are then based on that new salary. The newretirement account balance is determined by applying a varying stock market return (normaldistribution) to the increase in the retirement account. Then the contribution and matching forthat year are added to the balance for the next years balance to base return upon.


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Model Form

For this analysis, I chose to use an excel-based Monte Carlo analysis, using the CrystalBall software add-in. The models use simple, end of the year, financial balance calculations.The models begin with the median salary for workers in the model age groups, using the average401k balance for the age group. Employee contributions are set at 6% of gross income with

employer matching of 3% gross income. Annual salary (S) is based on the previous yearssalary, plus an increase (I). The retirement balance is based on the beginning of year accountbalance (RAi+1), which is the previous years end of year balance (RAi), plus the employee (Ci)and employer (Mi) contributions at the end of the last year. Then the model applies aprobabilistic distribution of S&P 500 returns (Ri+1) based on the 1982 through 2011 period(MoneyChimp.com, 2012). The annual salary (S) and retirement account balance are calculatedaccording to the formulas below:

The Monte Carlo analysis was run with 10,000 trials on the 71 data points that affectedsalary and account return.

Data Description

The data used in the financial forecasting model is an expected pay increase based oninflation from 1982 through 2011, with a minimum value of 0% and a maximum value of 5%.The starting annual salary is based on the median salary for that age group from the 2009 census

update produced and the beginning 401k balance is based on the average balance for that agegroup reported by the Employee Benefits Research Institute. The annual return on the retirementaccount is based on the annualized S&P 500 return data and standard deviation of returns for1982 through 2011 (MoneyChimp, 2012).

Model Results

Two financial models were createdone for a 32-year old worker retiring at age 67 and a47-year old worker retiring at age 67 per the current Social Security full retirement requirements.

32-Year Old Employee Model

In this model, the employees annual salary was $31,914 with a retirement accountbalance of $16,910. With an expected pay increase of 3% annually and an expected accountreturn of 7.84% annually, the model produced a base retirement account balance of $982,359.This is very close to the $1 million account balance target. However, annualized averages do notshow what really happens over time with a retirement account, such as recessions and thefinancial crisis.

On a probabilistic basis, the mean retirement account balance was $959,652. Theprobability of reaching $1 million was 33.16%, as shown in the chart below.


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While that preceding chart is helpful in determining what the probability is of achievingthe million dollar goal, it is more helpful to know what a more likely outcome is going to be. Todetermine that figure, a 90% certainty was entered into the interactive chart produced from thesimulation and it is more likely that such a worker would have a balance of $321,814 in theirretirement account. Therefore, there is only a 10% chance that the average worker would have ahigher 401k balance when they retire.

47-Year Old Employee Model

In this model, the employees annual salary was $44,731 with a retirement accountbalance of $64,237. With an expected pay increase of 3% annually and an expected account

return of 7.84% annually, the model produced a base retirement account balance of $564,577.This falls significantly short of the $1 million account balance target. On a probabilistic basis,the mean retirement account balance was $ 555,586. The probability of reaching $1 million was9.44%, as shown in the chart below.


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While that preceding chart is helpful in determining what the probability is of achievingthe million dollar goal, it is more helpful to know what a more likely outcome is going to be. Todetermine that figure, a 90% certainty was entered into the interactive chart produced from thesimulation and it is more likely that such a worker would have a balance of $ 231,387 in theirretirement account. Therefore, there is only a 10% chance that the average worker would have ahigher 401k balance when they retire.

Conclusion

Retirement planning is often targeted towards the middle class and higher income levels.However, even a simplified model of financial planning shows how difficult it is to reach the

retirement goal of one million dollars. This paper and model do not even address whether thatamount would really be enough to cover a retirees housing, medical and food expenses. Medicaland household utility expenses, specifically, have been rising at two to three times the rate ofinflation for the past 25 years and those two expenses hit seniors on fixed incomes hard. Manybaby boomers and younger workers have mortgages that are under water. Plus there is a highamount of indebtedness among American workers and that also makes it difficult to contributemore to their retirements because they are just trying to deal with current expenses.

The simple model for the older worker also suggests that many older workers who havenot participated in some kind of retirement plan or 401k are not going to have enough to fullyretire and many need to work well into their retirement, which has ramification for many workplaces in terms of having paths of progressions for younger and newer employees, as well as the

need for immigration for lower wage service industries, which many semi- or formerly retiredseniors work in. The contrast in results for the models also support the notion that it is better toget started early than to count on larger income in the future.

Areas of future research that have some attention or should get more attention involve theimpact of working seniors on the U.S. workforce, the possible impact of the Baby Boomersretirements on the returns of the stock market in the future, and the viability of 401k plans iflong-term market returns for the next 20 to 30 years are significantly lower than the previouscomparable time period. The large number of people in retirement plans and the broad


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ownership of stocks have supported some of the growth in returns of the stock and could beaffected when many retirements start the gradual or sudden process of liquidating their stockholdings. The overwhelming majority of assets owned in the U.S. belong to citizens in their 50sor older. Last, the realities of the difficulty of achieving a sustainable retirement in light ofincreases in life expectancy may also suggest that financial education may need to be more

comprehensive, in-depth and become a part of the U.S. education system curriculum if thecountry is to seriously realize the benefits of that education.


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References

401(k) resource guide. (2012).Internal Revenue Service. Retrieved April 11, 2012 fromhttp://www.irs.gov/retirement/participant/article/0,,id=151786,00.html

Balkam, S. (2008).Are Baby Boomers Saving Enough for Retirement? Bryant University.Retrieved fromhttp://www.google.com/url?sa=t&rct=j&q=are%20baby%20boomers%20saving%20enough%20money%20for%20retirement%20balkam&source=web&cd=2&ved=0CD0QFjAB&url=http%3A%2F%2Fdigitalcommons.bryant.edu%2Fhonors_finance%2F3%2F&ei=3RSgT5vwCJT-8AS4iuGCAQ&usg=AFQjCNEQDk9yAWhd-wCmMEnsSRrCAgKM1w

Bassett, W.F., Fleming, M.J. & Rodrigues, A.P. (2009). How workers use 401(k) plans: theparticipation, contribution and withdrawal decisions.Bureau of Labor Statistics.Retrieved April 11, 2012 from

http://www.fednewyork.org/research/staff_reports/sr38.pdf.

Bunkley, N. (2012, February 15). G.M. changes pensions for salaried workers. New York Times.Retrieved April 11, 2012 from http://www.nytimes.com/2012/02/16/business/gm-eliminates-pensions-for-salaried-workers.html

Burke, P. (2012, January 31). As 401(k) turns 30, let's make it better. USA Today. Retrievedfrom http://www.usatoday.com/news/opinion/forum/story/2012-01-31/401k-retirement-savings-pensions-benefits/52905648/1

Department of Labor (2012).Employee Retirement Income Security ActERISA. Retrievedfrom http://www.dol.gov/dol/topic/health-plans/erisa.htm

Employee Benefits Research Institute (2011, October). EBRI Notes. 32(10). Retrieved fromhttp://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4913

Fidelity Investments (2011). Fidelity Releases Quarterly Snapshot On 401(k)s ShowingAverage Savings Inched Higher in 2011. Retrieved from http://www.fidelity.com/inside-fidelity/employer-services/fidelity-releases-quarterly-snapshot-on-401ks

Ghilarducci, T. (2008). When Im Sixty-Four: The Plot against Pensions and the Plan to SaveThem. Trenton, NJ: Princeton University Press.

Jeszeck, C. (2011). 401(k) Plans: Improved Regulation Could Better Protect Participants fromImproved Conflicts of Interest, U.S. General Accountability Office. New York: DIANEPublishing.

Jewell, M. (2012, February 9). Fidelity: Average 401(k) balances end 2011 largelyunchanged,despite higher contributions.Associated Press. Retrieved April 11, 2012 fromhttp://www.startribune.com/business/yourmoney/139002309.html


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Landier, A. & Nair, V.B. (2008).Investing for Change: Profit from Responsible Investment.NewYork: Oxford University Press.

Mink, E. (2011).Average 401(k) Account Balances by Age Group. Retirement Planning @ Suite

101. Retrieved from http://elaine-mink.suite101.com/average-401k-account-balances-by-age-group-a332909

MoneyChimp (2012). Compound Annual Growth Rate (Annualized Return): 1982 - 2011.Retrieved from http://www.moneychimp.com/features/market_cagr.htm

Savage, T. (2009). The New Savage Number: How Much Money Do You Really Need to Retire? New York: John Wiley & Sons.

Willis, L. (2011). The Financial Education Fallacy. American Economics Association 2011Annual Meeting. Retrieved from

http://retirementincomejournal.com/upload/567/TheFinancialEducationFallacy_preview.pdf


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0 1 914 84 7 84%

8 40 427 70 1 212 83 7 84%

16 1 212 9 1 36 38 84%

Appendix A32 Year Old Worker 401k at Retirement Model

S&P 500 CAGR (19822011) 7.84%

S&P 500 Std. Dev. (19822011) 16.69%

Contribution 6%

Matching 3%

Year

Pay Increase/

Inflation Annual Salary Contribution Matching BOY RA Balance Annual Return EOY RA Balance

0 31,914.00 1,914.84 957.42 16,910.00 7.84% 18,235.74

1 3% 32,871.42 1,972.29 986.14 21,108.00 7.84% 22,762.87

2 3% 33,857.56 2,031.45 1,015.73 25,721.30 7.84% 27,737.85

3 3% 34,873.29 2,092.40 1,046.20 30,785.03 7.84% 33,198.58

4 3% 35,919.49 2,155.17 1,077.58 36,337.18 7.84% 39,186.01

5 3% 36,997.07 2,219.82 1,109.91 42,418.76 7.84% 45,744.39

6 3% 38,106.98 2,286.42 1,143.21 49,074.12 7.84% 52,921.53

7 3% 39,250.19 2,355.01 1,177.51 56,351.16 7.84% 60,769.09

8 3% 40,427.70 2,425.66 1,212.83 64,301.61 7.84% 69,342.86

9 3% 41,640.53 2,498.43 1,249.22 72,981.35 7.84% 78,703.0910 3% 42,889.75 2,573.39 1,286.69 82,450.74 7.84% 88,914.88

11 3% 44,176.44 2,650.59 1,325.29 92,774.96 7.84% 100,048.52

12 3% 45,501.73 2,730.10 1,365.05 104,024.40 7.84% 112,179.91

13 3% 46,866.78 2,812.01 1,406.00 116,275.06 7.84% 125,391.02

14 3% 48,272.78 2,896.37 1,448.18 129,609.03 7.84% 139,770.38

15 3% 49,720.96 2,983.26 1,491.63 144,114.93 7.84% 155,413.54

16 3% 51,212.59 3,072.76 1,536.38 159,888.43 7.84% 172,423.68

17 3% 52,748.97 3,164.94 1,582.47 177,032.82 7.84% 190,912.19

18 3% 54,331.44 3,259.89 1,629.94 195,659.60 7.84% 210,999.31

19 3% 55,961.38 3,357.68 1,678.84 215,889.14 7.84% 232,814.85

20 3% 57,640.22 3,458.41 1,729.21 237,851.37 7.84% 256,498.92

21 3% 59,369.43 3,562.17 1,781.08 261,686.54 7.84% 282,202.76

22 3% 61,150.51 3,669.03 1,834.52 287,546.01 7.84% 310,089.6223 3% 62,985.03 3,779.10 1,889.55 315,593.17 7.84% 340,335.67

24 3% 64,874.58 3,892.47 1,946.24 346,004.32 7.84% 373,131.06

25 3% 66,820.82 4,009.25 2,004.62 378,969.77 7.84% 408,681.00

26 3% 68,825.44 4,129.53 2,064.76 414,694.87 7.84% 447,206.95

27 3% 70,890.20 4,253.41 2,126.71 453,401.24 7.84% 488,947.90

28 3% 73,016.91 4,381.01 2,190.51 495,328.02 7.84% 534,161.74

29 3% 75,207.42 4,512.45 2,256.22 540,733.26 7.84% 583,126.75

30 3% 77,463.64 4,647.82 2,323.91 589,895.42 7.84% 636,143.22

31 3% 79,787.55 4,787.25 2,393.63 643,114.95 7.84% 693,535.16

32 3% 82,181.18 4,930.87 2,465.44 700,716.04 7.84% 755,652.18

33 3% 84,646.62 5,078.80 2,539.40 763,048.49 7.84% 822,871.49

34 3% 87,186.02 5,231.16 2,615.58 830,489.69 7.84% 895,600.08

35 3% 89,801.60 5,388.10 2,694.05 903,446.82 7.84% 974,277.05

Retirement Account Balance 982,359.20


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32YO_Worker_Model.xlsx

Page 1

Crystal Ball Report - Full Simulation started

on 4/28/2012 at 5:51 PM Simulation stoppedon 4/28/2012 at 5:51 PM

Run preferences:

Number of trials run 10,000

Extreme speed

Monte CarloRandom seedPrecision control on

Confidence level 95.00%

Run statistics:Total running time (sec) 4.22

Trials/second (average) 2,367

Random numbers per sec 168,071

Crystal Ball data:

Assumptions 71

Correlations 0

Correlated groups 0

Decision variables 0

Forecasts 1

Forecasts

Worksheet: [32YO_Worker_Model.xlsx]Retirement Account Model

Forecast: 401(k) Balance at Retirement Cell: I46

Summary:

Certainty level is 33.16%

Certainty range is from 1,000,000.00 to InfinityEntire range is from 71,260.33 to 13,294,788.36

Base case is 982,359.20

After 10,000 trials, the std. error of the mean is 7,829.91


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Page 2

Forecast: 401(k) Balance at Retirement (cont'd) Cell: I46

Statistics: Forecast valuesTrials 10,000

Base Case 982,359.20

Mean 959,652.17

Median 735,800.03

Mode 349,504.95Standard Deviation 782,991.37

Variance 613,075,491,758.19

Skewness 3.21

Kurtosis 23.67Coeff. of Variability 0.8159

Minimum 71,260.33

Maximum 13,294,788.36

Range Width 13,223,528.03Mean Std. Error 7,829.91

Percentiles: Forecast values

0% 71,260.33

10% 321,813.7520% 420,301.64

30% 518,771.5040% 623,058.51

50% 735,798.1060% 882,982.99

70% 1,057,151.31

80% 1,341,603.22

90% 1,834,751.51100% 13,294,788.36

End of Forecasts


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Page 3

Assumptions


Assumption: - Cell: C10

Triangular distribution with parameters:Minimum 0%

Likeliest 3%

Maximum 5%

Assumption: Annual Return Cell: H9

Normal distribution with parameters:

Mean 7.84%

Std. Dev. 16.69%

Assumption: C11 Cell: C11

Triangular distribution with parameters:

Minimum 0%

Likeliest 3%Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%





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Page 4



MinimumLikeliest

Maximum

0%

3%

5%

Minimum

LikeliestMaximum

3%

3%3%



Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%Likeliest 3%

Maximum 5%




21/46


Minimum

Likeliest

Maximum

0%

3%

5%

Page 5



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%




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MinimumLikeliest

Maximum

0%3%

5%


MinimumLikeliest

Maximum

0%

3%5%

Page 6



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%




Minimum 0%

Likeliest 3%

Maximum 5%



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MinimumLikeliest

Maximum

0%

3%5%

Page 7




MinimumLikeliest

Maximum

0%3%

5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%




Likeliest 3%

Maximum 5%



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MinimumLikeliest

Maximum

0%

3%5%

Page 8




Minimum 0%




Minimum 0%

Likeliest 3%

Maximum 5%






Minimum 0%

Likeliest 3%

Maximum 5%



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MinimumLikeliest

Maximum

0%

3%5%

Page 9



Minimum 0%




Minimum 3%

Likeliest 3%

Maximum 3%



Minimum 3%




Minimum 0%

Likeliest 3%

Maximum 5%


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Page 10



Minimum 0%

Likeliest 3%

Maximum 5%

Assumption: H10 Cell: H10


Mean 7.84%Std. Dev. 16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


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Page 11



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


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Mean

Std. Dev.

7.84%

16.69%

Mean

Std. Dev.

7.84%

16.69%

Page 12



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%




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Mean

Std. Dev.

7.84%

16.69%

Page 13




Mean 7.84%

Std. Dev. 16.69%


Normal distribution with parameters:Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%




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Mean

Std. Dev.

7.84%16.69%

Page 14

Normal distribution with parameters:Mean

Std. Dev.

7.84%

16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



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Page 15




Mean

Std. Dev.

7.84%16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


Normal distribution with pa rameters:

Mean 7.84%

Std. Dev. 16.69%


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Page 16




Mean

Std. Dev.

7.84%16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


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End of Assumptions


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0 2 683 86 7 84%

8 56 663 87 1 699 92 7 84%

16 1 80 09 2 1 3 40 84%

Appendix B47 Year Old Worker 401k at Retirement Model

S&P 500 CAGR (19822011) 7.84%

S&P 500 Std. Dev. (19822011) 16.69%

Contribution 6%

Matching 3%

Year

Pay Increase/

Inflation Annual Salary Contribution Matching BOY RA Balance Annual Return EOY RA Balance

0 44,731.00 2,683.86 1,341.93 64,237.00 7.84% 69,273.18

1 3% 46,072.93 2,764.38 1,382.19 73,298.97 7.84% 79,045.61

2 3% 47,455.12 2,847.31 1,423.65 83,192.18 7.84% 89,714.45

3 3% 48,878.77 2,932.73 1,466.36 93,985.41 7.84% 101,353.87

4 3% 50,345.13 3,020.71 1,510.35 105,752.96 7.84% 114,043.99

5 3% 51,855.48 3,111.33 1,555.66 118,575.05 7.84% 127,871.33

6 3% 53,411.14 3,204.67 1,602.33 132,538.32 7.84% 142,929.32

7 3% 55,013.47 3,300.81 1,650.40 147,736.32 7.84% 159,318.85

8 3% 56,663.87 3,399.83 1,699.92 164,270.06 7.84% 177,148.83

9 3% 58,363.79 3,501.83 1,750.91 182,248.58 7.84% 196,536.87

10 3% 60,114.70 3,606.88 1,803.44 201,789.61 7.84% 217,609.92

11 3% 61,918.14 3,715.09 1,857.54 223,020.24 7.84% 240,505.03

12 3% 63,775.68 3,826.54 1,913.27 246,077.66 7.84% 265,370.15

13 3% 65,688.95 3,941.34 1,970.67 271,109.96 7.84% 292,364.98

14 3% 67,659.62 4,059.58 2,029.79 298,276.99 7.84% 321,661.91

15 3% 69,689.41 4,181.36 2,090.68 327,751.28 7.84% 353,446.98

16 3% 71,780.09 4,306.81 2,153.40 359,719.02 7.84% 387,920.99

17 3% 73,933.49 4,436.01 2,218.00 394,381.20 7.84% 425,300.69

18 3% 76,151.49 4,569.09 2,284.54 431,954.70 7.84% 465,819.95

19 3% 78,436.03 4,706.16 2,353.08 472,673.58 7.84% 509,731.19

20 3% 80,789.11 4,847.35 2,423.67 516,790.43 7.84% 557,306.80

Retirement Account Balance 564,577.82


35/46


Page 1

Crystal Ball Report - Full Simulation started

on 4/28/2012 at 5:58 PM Simulation stopped

on 4/28/2012 at 5:58 PM

Run preferences:

Number of trials run 10,000

Extreme speed

Monte CarloRandom seed

Precision control on

Confidence level 95.00%

Run statistics:

Total running time (sec) 2.08

Trials/second (average) 4,817

Random numbers per sec 197,511

Crystal Ball data:

Assumptions 41

Correlations 0

Correlated groups 0

Decision variables 0Forecasts 1

Forecasts


Forecast: 401(k) Balance at Retirement Cell: I31

Summary:

Certainty level is 9.44%

Certainty range is from 1,000,000.00 to Infinity

Entire range is from 66,204.65 to 3,943,425.75

Base case is 564,577.82After 10,000 trials, the std. error of the mean is 3,527.51


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Page 2

Forecast: 401(k) Balance at Retirement (cont'd) Cell: I31

Statistics: Forecast values

Trials 10,000

Base Case 564,577.82

Mean 555,586.42

Median 464,623.35

Mode ---Standard Deviation 352,751.30

Variance 124,433,480,391.80

Skewness 2.26

Kurtosis 11.90

Coeff. of Variability 0.6349

Minimum 66,204.65

Maximum 3,943,425.75

Range Width 3,877,221.10

Mean Std. Error 3,527.51

Percentiles: Forecast values

0% 66,204.65

10% 231,387.24

20% 293,351.3630% 351,001.67

40% 404,754.46

50% 464,621.44

60% 534,262.50

70% 628,435.67

80% 756,475.29

90% 978,503.87

100% 3,943,425.75

End of Forecasts


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Page 3

Assumptions


Assumption: - Cell: C10


Likeliest 3%

Maximum 5%

Assumption: Annual Return Cell: H9


Mean 7.84%

Std. Dev. 16.69%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%


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Page 4



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 3%



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Minimum

Likeliest

Maximum

0%

3%

5%


Minimum

Likeliest

Maximum

0%

3%

5%

Page 5



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Likeliest 3%

Maximum 5%



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Minimum

Likeliest

Maximum

0%

3%

5%

Page 6




Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Minimum 0%

Likeliest 3%

Maximum 5%



Likeliest 3%

Maximum 5%



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Mean

Std. Dev.

7.84%

16.69%

Page 7



Minimum 0%

Likeliest 3%

Maximum 5%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


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Mean

Std. Dev.

7.84%

16.69%

Page 8



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


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Page 9



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


Normal distribution with parameters:Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%


44/46

Page 10




Mean

Std. Dev.

7.84%

16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%



Mean 7.84%

Std. Dev. 16.69%

End of Assumptions


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Page 11



46/46

Appendix CInflation for the S&P 500 Return Period

year inflation2011 3.16% 247.6989 3.18%2010 1.64%

240.11142009 -0.34% 236.23712008 3.85% 237.04312007 2.85% 228.25532006 3.24% 221.93022005 3.39% 214.96542004 2.68% 207.9172003 2.27% 202.49022002 1.59% 197.99572001 2.83% 194.89692000 3.38%

189.53311999 2.19% 183.33631998 1.55% 179.40731997 2.34% 176.66891996 2.93% 172.62941995 2.81% 167.71531994 2.61% 163.13141993 2.96% 158.98191992 3.03% 154.41131991 4.25% 149.87031990 5.39% 143.76051989 4.83% 136.40811988 4.08% 130.12311987 3.66% 125.02221986 1.91% 120.6081985 3.55% 118.34751984 4.30% 114.29021983 3.22% 109.57841982 6.16% 106.16

100

the million dollar retirement

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