The resident financial planners at Financial Finesse handle a variety of difficult questions from employees representing many different walks of life and unique backgrounds. One common area of concern these days is retirement. In fact, nearly 31% of all employees indicate that retirement is their number one financial planning priority. A recent helpline caller represented a perfect example of how a seemingly complex retirement planning scenario can be simplified using some quick and easy to use retirement planning tools.
Like the nearly one-third of fellow employees concerned about retirement, Anita came to us as a 45-year old who has been saving regularly in her 401(k). Despite getting off to a slow start with her retirement savings, she now is able to set aside 15% of her pay towards retirement and has approximately $125,000 in her 401(k) plan. The big question that was looming in the back of her mind – “is this enough for me to be able to retire in about 15-20 years?” She had never run any type of retirement analysis before and admitted she didn’t know where to start. She also acknowledged that she was becoming more and more anxious about her ability to retire. While her initial instinct was to assume the initial answer was “no, she was not on track,” she quickly found out a little awareness can go a long way and provide much needed peace of mind.
With the guidance of her financial planner, Anita entered her income information and provided some details regarding her current retirement savings. The results – Anita’s retirement income analysis revealed that she is currently on track to replace around 71% of her $75,000 annual salary. In today’s dollars, this is approximately $53,061 but falls a little short of the 80% income replacement mark that many planners use as a general rule of thumb. This was an encouraging realization for Anita because she feared a more bleak retirement outlook. She found additional comfort in knowing that her car loan would soon be paid off and this would allow her to begin contributing up to the maximum annual amount to her Roth IRA ($5,000 per year since she is under 50). Contributing to a Roth IRA would improve her retirement outlook and increase her retirement income to $61,796 in today’s dollars, over 82% of her current income and definitely within the retirement “safe zone” based on her goals and assumptions.
Bottom line: This employee used the process of running a retirement calculation that made her more aware of her general retirement outlook and helped identify an action plan.
For many employees like Anita, planning and saving for retirement is a complex process. Retirement confidence remains low for employees in the workplace with only 13% saying they were “Very” confident and 36% saying they were “somewhat” confident according to a recent EBRI study. In fact, in our latest research study on financial trends among employees in the workplace, we found that only about 17% of employees reported that they were on track to retire. When the research is broken down by gender, the results are even more disconcerting – with only 13% of women reporting that they know they are on target to replace at least 80% of their income in retirement (or their own retirement income replacement goal).
So what are some important steps that we can take to increase retirement confidence and preparedness?
Well, in order to start the retirement planning process, it is important to understand the amount of wealth actually needed to reach retirement goals. Unfortunately, less than half of all U.S. households indicate they have taken the time to calculate how much money they need to live a comfortable lifestyle in retirement. Our recent findings revealed that of all of those employees that did NOT indicate they were on track to retire, 79% had not run a retirement calculation. Some of the most common reasons people fail to estimate their retirement saving needs include the following: lack of understanding of the importance of the calculation itself, lack of education regarding how to calculate the amount needed, and fear of finding out the retirement savings gap is too big to overcome.
Perhaps one of the biggest challenges faced by financial educators and financial planners attempting to help employees improve their retirement outlook involves the simple concept of awareness. Employees need to understand their long-term goals and begin establishing a vision for a day that they will eventually have the financial freedom to not have to clock in and out of work every day. Life is full of obstacles and daily distractions that make it difficult to see just how important it is to start planning for retirement (no matter what the age).
When people like our recent helpline caller take the time to assess their retirement planning progress (or lack of progress), the benefits can be long lasting and improve the prospects of thriving during retirement years. In fact, research suggests that the simple activity of running a retirement income projection leads to increased reports of retirement preparedness and a greater rate of savings. Running a retirement needs analysis increases actual retirement savings among both younger and older workers. This is encouraging because past studies have shown that younger workers (24-34) are less likely to establish retirement goals than their older colleagues. We also typically see that employees with higher income and more formal education are more likely to take the time to estimate their retirement needs.
Benefits professionals play an important role in encouraging employees to run their own retirement calculation. Through general financial education and awareness, employees have the ability to gain valuable access to tools such as retirement calculators and multidimensional methods such as workshops, online learning centers, financial counseling, and unbiased meetings with financial planners. These financial wellness programs designed to improve retirement preparedness should place a continued emphasis on calculating retirement savings needs as well as providing guidance about retirement saving alternatives. Workers have many potential obstacles on their journey to retirement such as the uncertain future of Social Security, inflation risks, increasing health care costs, and longer life expectancies to name just a few. As I have mentioned before, the first step is for employers to give their workforce the tools needed to analyze where they stand. This can be in the form of an online retirement calculator (one of the most common being Financial Engines®) or a retirement preparedness assessment such as the Ballpark E$timate® available through the EBRI. Whatever the “retirement number” may be, a little awareness can go a long way to help employees create and follow an action plan to meet their retirement goals.