Cecily O'Connor
RedwoodAge.com

New research suggests that investment returns generated by 401(k) plans after retirement play a bigger role than most boomers might think.

While the conventional thinking is that retirement income is generated from savings and returns accumulated during a participant’s working years, it’s not the predominant source. That's because about two-thirds of retirement income comes from investment returns that are earned during - not prior - to retirement, according to Russell Investments, a Tacoma, Wash.-based money manager.

These findings have led to the creation of the so-called 10/30/60 rule, which breaks down the plan benefits that a plan participant receives in retirement.

In addition to the 60 percent that rolls in after retirement, approximately 10 percent of each retirement income dollar consists of contributions made to the plan while working and 30 percent is made up of investment returns generated prior to exiting the workforce. 

While the current stock market volatility can cause boomers 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 Matt Smith, managing director, retirement services, and co-author of the study.

These findings build off defined benefit pension plan research conducted in 1989 in which Don Ezra, then director of investment strategy at Russell, found that for any one plan member, the largest part of the investment return accrues during the payout stage.

Contributions Matter
The new research, authored by Smith and Bob Collie, director of investment strategy, found the 10/30/60 pattern was stable even after accounting for various scenarios. Russell altered several 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.

While the potential for generating strong returns is encouraging, “it would be wrong” to conclude that individuals’ contributions are not important, too, Smith said.

“Indeed, without contributions there can be no investment return,” Smith said. “However, with roughly 90 percent of distributions being generated by investment earnings, sound investment programs are critical if DC (defined contribution) plans are to be effective in meeting goals for financial security in retirement.”

Of course, individual circumstances vary, and  it's always best for investors to discuss their plans with a professional.