Investment returns, not savings, critical to retirement income

Russell’s latest report builds from research in a 1989 report, “”A Model of Pension Fund Growth” in which Don Ezra, director, Investment Strategy, modeled a DB plan growth and found that “for any one plan member, the largest part of the investment return…accrues during the payout stage.” This approach was later dubbed the 10/30/60 Rule by authors Matt Smith, managing director, Retirement Services and Bob Collie, director, Investment Strategy.

Their findings show that in a defined contribution context, the plan benefits that a participant receives in retirement are broken down as follows:

• 10 percent of each retirement income dollar consists of contributions made to the DC plan while working
• 30 percent is made up of investment returns generated prior to retirement
• 60 percent is made up of investment returns generated after 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,” Smith said in a press release. “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.”