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By Christine Benz | 09-29-2011 12:39 PM

Assessing the Impact of Missed Retirement Plan Contributions

Younger workers are better able to make up for lost savings during periods of unemployment, says T. Rowe Price's Christine Fahlund.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

With the unemployment rate stubbornly high and the economy still relatively weak, many employees have stopped contributing to their retirement plans.

Here to discuss some recent research into this topic is Christine Fahlund. She is senior financial planner with T. Rowe Price.

Chris, thanks so much for joining me.

Christine Fahlund: Delighted.

Benz: So, Chris, you came out with some very interesting and practical research into this topic of retirement plan contributions and why employees might stop them, but I would like to talk about the implications of this research.

If you are someone who has had to stop contributing to your retirement plan either because you have been laid off or maybe voluntarily decided to stay home and take care of your kids, what are the takeaways from the research that you recently did into this topic?

Fahlund: Well, if you are a younger saver, what we found was that missed contributions are going to have an impact by the time you reach a retirement date, but you have so many years in which to catch up, because you missed those contributions that in order to catch up, it's quite easy. You simply have to increase your contributions by a few percentage points, and you will be back on track. So that's the good news.

Benz: Right. But if you don't increase your contribution rate at a later date, you found that people who do stop retirement plan contributions early on in their careers, actually, it's pretty impactful in terms of their bottom line when it comes time for them to retire?

Fahlund: It certainly can be. For example, a 25-year-old who missed the first five years wouldn't be able to supply 50% of their retirement income from their nest egg at that point--it would probably be closer to 40% is the best they could do.

Benz: You used that 50% as kind of a baseline replacement rate?

Fahlund: Exactly. It can make a difference as to how much social security you are getting, but just in general that's a good rule of thumb. 50% should come from your nest egg.

Benz: One thing you found was that for older savers, those who stopped retirement plan contributions, that's harder to make up?

Fahlund: Well, that's the bad news. It's harder to make up, because you don't have time on your side. So, if you have to make up those contributions, they don't have time to grow for very long. So, the good news for the older investors is that they have already saved a nest egg and those additional contributions that they missed, probably wouldn't have had a large impact anyway.

So, they can relax a little easier knowing that they are going to have to look at other strategies. Just increasing their contributions isn't going to do it.

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