Glenn Dial, Senior Retirement Strategist at American Century Investments®, has published research on how investors need to make informed decisions on retirement savings by truly understanding income replacement rates.
Dial’s Cracking the Retirement Code: Income Replacement Rates states that investors can’t have a solid retirement plan without first understanding how much income is needed during retirement. The income replacement rate is the percentage of pre-retirement income necessary retirees need in order to maintain their current standard of living after retirement. It is only after the desired retirement income is determined that investors and their advisors can plan an appropriate type of protected income solution that is a good fit during the working years.
Dial notes that the retirement planning industry needs to educate employers and retirement plan sponsors on this issue. While the financial industry standard is to plan to retire on 75% of pre-retirement income, employers may place this number anywhere between 51% and 80%. Investors have an even wider range of expectations, with responses ranging from 40% to 100%.
The retirement savings industry continues to evolve, as fewer employees are covered by traditional defined benefit (DB) pension plans. As the number of DB plans declines, employers are offering defined contribution (DC) plans, such as 401(k)s, to their employees. Initially, employees had the option to choose how much to save and how their assets would be allocated within the plans. This left workers with a wide range of outcomes, ranging from zero retirement savings to very large accumulations in their DC plans.
This range of outcomes is narrowing, as an increasing number of employers are offering auto-enrollment, auto-saving increases and auto-default into target-date funds. Although allocations to target-date funds are increasing, many plan participants mistakenly believe that these investments are guaranteed not to lose money and will provide guaranteed income at retirement. While workers have an interest in guaranteed lifetime income, only 5% of employers currently include this as an option in plan design. Plan sponsors should continue to educate their employees on the complexities of retirement investing, as many investors still lack a strong understanding of how and why their retirement assets are being invested.
Unfortunately, investors are simultaneously concerned about accepting market risk and lacking confidence that they will have sufficient funds in retirement. This is a disconnect, as investors seek long-term asset growth while also looking for protection and low drawdowns along the way. Investors are also seeking guidance on retirement income, as they may be uncertain about how to convert the assets in their retirement accounts into guaranteed lifetime income.
WEBCAST – 2026 Municipal Bond Outlook
With some of the politically driven uncertainty of 2025 behind us and record setting municipal issuance grabbing headlines, what is in store for the municipal bond market in 2026?
Join our municipal bond team for a discussion on:
- Highlights from 2025 municipal market performance
- Themes for 2026 including technical and fundamental factors
- Economic backdrop for the first quarter of 2026
Accepted for 1 CFP® / IWI / CFA CE Credit
Resources:
Methodology: The participant survey was conducted between June 3, 2025, and June 23, 2025. The survey included 1,500 full-time workers between the ages of 25 and 70 saving through their employer’s retirement plan. The data were weighted to reflect key demographics (gender, income, and education) among all American private sector participants between 25 and 70.
The sponsor survey was conducted between May 20, 2025, and June 16, 2025. Survey included 500 plan sponsor representatives holding a job title of Director or higher and having considerable influence when it comes to making decisions about their company’s retirement plan (either 401(k), 403(b), or 457 plans). The data were weighted to reflect the makeup of the total defined contribution population by plan asset size.
Percentages in the tables and charts may not total 100 due to rounding and/or missing categories.
Greenwald Research of Washington, D.C., completed data collection and analysis.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
You could lose money by investing in a mutual fund, even if through your employer’s plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
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