WHY RETIREMENT READINESS IS NOT JUST A CATCH-PHRASE
Many employees are confused about retirement and are unprepared to retire on time. According to the National Institute on Retirement Security (March 2015), 45% of working-age households do not have a retirement account of any kind (e.g. IRA or 401(k)), and the average working-household has virtually no retirement savings – only $2,500 average – when you take into account all working-age households. For workers age 55 – 64, some 62% have less than one times their average annual salary. Six out 10 Americans interviewed believe we are facing a Retirement Crisis.
Something needs to be done. Now. Employers are in a key position to make a difference to their employees' well-being. Simply having a retirement plan will not be enough. For many of your employees, your 401(k) plan is central to your employees' retirement goals. You can offer a match to create motivation for employees to save more. If there is no match, there are plan-design strategies that help encourage more savings, like auto-enrollment and auto-escalation. For several reasons, Retirement Readiness is becoming an employer issue.
Retirement Readiness is the extent to which an employee is financially ready to retire or to the extent the employee is saving for retirement so that he or she is able to place his or her current income in retirement and may be able to provide a similar lifestyle that they currently enjoy. Being ready to retire financially may also need to coincide with being able to retire mentally and physically.
How much does it cost the employer to have under-prepared employees? Many factors come into play with an aging workforce. Having employees who are growing older at work tend to have more health-related and physical problems that may lead to lower productivity. Employees who worry about not having enough money saved for retirement may have stress that leads to health issues. Having older employees traditionally costs employers more than younger workers – not only salary, but the cost of benefits. These costs can add up fast, and employers with unprepared workers may face higher costs, for each under-prepared worker, each year.
Why is Retirement Readiness a mutual responsibility between the employee and the employer? If the employer doesn't make a commitment to preparing its employees for retirement, who will? Experience shows that saving money from a paycheck before the employee receives the paycheck will likely result in significantly higher savings rates than saving on their own. As mentioned above, an aging workforce can be very costly. It is time for employers to take a more active role in helping its employees to retire on time and with enough money.
How do you know if an employee is ready to retire? At Waterfront Financial Group, we believe it is important to visit with each of your employees, every year, to connect on their plan assets and savings rate. [see The Waterfront Difference] We maintain a file on each employee to track our meetings. To determine Retirement Readiness, we focus on what the employee deposits as net income. We look at their debt obligations and calculate a date which the debts will be retired. Next, we check in to Social Security and assess the income rates at ages 62, 67 and 70. We look at the current savings rate (including any employer match) into the 401(k) plan, assess their accumulated savings, assess the investment allocation and run a calculation about the Future Value of their savings. We then look at various withdrawal rates to determine the extent to which the employee can have a reasonable expectation for their money to last the duration of their retirement. We add this to the social security figures and add any other pensions that can be expected, and compare their current standard of living to the future retirement need.
If an employee is not on track, what can be changed to affect the outcome? Is the employee in a properly allocated investment portfolio that is appropriate for their retirement date? Are they saving enough? What would happen if they increased their savings rate just 1% each year? Can they adjust their spending so they can save more? Can they work until age 70? What about taxes, should some or all of the employee deferral be put into Roth 401(k)?
Answers to these questions can help employees get on track towards becoming Retirement Ready! That's good for your employees, and that's good for you.