9 Gifts To Best Prepare Employees for Retirement Readiness
“It’s that time of year, when the world starts to think…” about saving more for retirement? Perhaps. The end of the year brings to mind not only gift giving, but a reassessment of financial progress. One of the most urgent financial goals every working man and woman have is to achieve retirement readiness at a reasonable age. In a season of lists, it only makes sense that retirement plan fiduciaries consider sharing a checklist for retirement readiness with retirement savers all over this (soon to be) winter wonderland.
But, instead of the usual (and boring) annual list, why not consider livening things up a bit? After all, there’s more than one arrow in the quiver of knowledge. “There are many ways to educate people and encourage them to make changes,” says Andy Bush, Partner and Financial Advisor at Horizon Wealth Management in Baton Rouge, Louisiana. He says the best ways including using numbers, using emotions, or using them both. With that in mind, he are nine pointers to better prepare employees for retirement readiness:
#1: Accept Personal Responsibility – The most important factor in helping people to be ready for retirement is their knowing they can’t depend on anyone other than themselves. A company might offer a fine pension plan – today – but economic forces beyond control of even the more magnanimous owners can cause the company – and its fine pension – to disappear from the face of the Earth. Don’t fall prey to a false sense of security. Take advantage of all that personal retirement savings offers you today to control your own retirement destiny. Bush says, “I tell people point blank they are going to fail unless they take up the responsibility for their own future – which includes controlling their spending, socking away some of their income, and increasing their ability to earn.”
#2: Be the Ball (Know Your Goal) – You’ll never know which road is right for you if you have no idea where you intend to go. Spend some time to discover your ultimate destination before embarking on a series of random steps. This might involve some math, so don’t be afraid to get professional help if you need it. So, what’s a good starting point? “Employees should think in terms of replacing their paychecks in retirement,” says Rick Bender, Financial Advisor at Savant Capital Management in Rockford, Illinois. “Although an individualistic number should be used, a rough estimate of 70-80% of your gross income is a good place to begin. Once the target amount in the portfolio is established, investors can determine at what rate of withdrawal can the portfolio sustain during their retirement years. There’s also a lot variables for each person or couple to consider, such as what state to retire in, family longevity, health, and healthcare.”
#3: A Marathon, Not a Sprint – Since we’re talking about a journey, it’s important to understand time is on your side. Well, at least it should be. Saving for retirement is not one of those things for procrastinators. You’ll find the earlier you start, the easier it is on your personal cash flow. “Individuals need to recognize that saving for retirement is a marathon and not a sprint,” says Robert R. Johnson, President and CEO at The American College of Financial Services in Bryn Mawr, Pennsylvania. “And, like anyone running a marathon, training — putting the hours in prior to the marathon — is essential. Time is a critical element. Starting saving for retirement at age 25 is much better than starting at age 35. None other than Warren Buffett once said, ‘My wealth has come from a combination of living in America, some lucky genes, and compound interest.’ Having years to have money compound is truly the key to building wealth. “
#4: Think in Small Steps – Speaking of a marathon, remember, long distance marathoners generally walk (albeit at an accelerated rate) rather than walk. It’s a lot easier to get to “retirement readiness” if you can figure out a way to take small bites at your objective instead of huge gulps. You’ll find these little nibbles reduce the likelihood you’ll choke when the time comes to retire. “I encourage making modest, consistent changes so they can adjust and adapt,” says Bush. For example, he says “If they slowly increase their deferral percentage over a number of years, it will be less painful than jumping drastically up in one year.” In general, Bush says “it is hard for many people to take time to think of, envision and connect with a future them. But most can do simple math. So, if they can see that X contributed for Y many years at a hypothetical growth rate, they will end up with Z. Don’t try to solve the rest of your life. Look out to a time period that is within reach – 3 to 5 years. Most can think back 3 to 5 years up to now and see how things have either improved, stayed the same, or degraded. That amount of time is also a good enough span for them to accomplish something without losing vision of it.”
#5: Think Holistically – OK, this one might be a challenge. Most folks only consider a single avenue in terms of retirement readiness. That’s usually their 401k and the menu of mutual fund options that resides within it. But there’s a whole lot more to take into account. “Individuals also must recognize the need for a retirement income plan, not simply have a goal of accumulating their retirement ‘number’,” says Johnson. “Many people try and oversimplify retirement income planning. It is not about a number. It is about combining life insurance, long term care insurance, annuities, and investments into a cohesive plan that recognizes the individual’s unique circumstances, risk tolerance, and goals. It also is concerned with choosing the right Social Security claiming strategy. Retirement income planning is not easy and people should seek the assistance of a qualified professional. When we get ill we go to a doctor, when we get in a legal bind we seek the assistance of an attorney, yet somehow many of us believe that we should be able to navigate the complex waters of retirement income planning on our own.”
#6: Create an Emergency Fund – Once we get past the set-up phase, then it’s time to actually start talking about tangible steps. One of the most overlooked step is the need for an emergency fund. We can actually build this into your retirement savings plan. “Contributing at a 10%-15% rate into a qualified plan will lay a solid foundation for your retirement,” says Jill Knittel, Financial Advisor at Sage Rutty & Company in Rochester, New York. “Creating an emergency fund/account for unexpected financial challenges is important as well.”
#7: Put Stock in Your Future – While an emergency fund is great to build as you approach retirement, you can’t be overly cautious about investing your retirement assets in your younger years. “Another key is not being overly conservative with your asset allocation,” says Johnson. “Individuals with long time horizons until retirement should be invested entirely in equities. Since 1926, a large capitalization index of common stocks has returned a little over 10% compounded annually, while long-term corporate and government bonds have returned around 6%. Small capitalization stocks have returned even more, averaging over 12% compounded annually. Too many individuals, especially younger people, are far too conservative in their retirement plan asset allocations. These people essentially leave a lot of money on the table by not committing to equities for the long-run. Investors make the mistake of equating short-term volatility with long-run risk. Two of the greatest risks people face is retirement income shortfall risk and longevity risk (that is, outliving your assets). A survey by Allianz showed that overwhelmingly people feared outliving their assets more than death itself.”
#8: Avoid Loans – One impediment to retirement readiness is something euphemistically referred to as “leakage.” Too often, people see their retirement assets as “cheap” loans, when, in reality, these might be the most expensive loans you can take out. Why? Because they can rob you of a comfortable retirement. Knittel says, “We have seen many employees take loans against their 401k accounts, which limits long term growth and compounding within a 401k. Putting the money away in a retirement account with a mindset that it is ‘untouchable’ is the most successful way to go.”
#9: Do Nothing – Last, but certainly not least because more and more people are choosing this path, is to simply sit back, relax, and enjoy the automatic functions of your retirement plan. As a greater number of plans roll out these features, don’t be surprised if employees pay less attention to their retirement plan because inertia is not only a terrible thing to waste, but it allows plenty of time to worry about something completely different. Matt Cosgriff, a Retirement Plan Consultant with BerganKDV Wealth Management in Minneapolis, Minnesota, says, “As more and more plans begin to enlist plan design features like auto-enrollment and auto-escalation, the best thing many employees can do is actually nothing. In fact, inertia can be the best thing for an employee if the plan sponsor has designed a plan that takes advantage of inertia in a positive way for employees by auto-enrolling them up to the company match and then auto-increasing their contribution up to 10-20%.”
Retirement savers are encouraged to take these nine stocking stuffers and use them to better prepare themselves for retirement readiness.
Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s (including information on the new wave of plan designs) every 401k plan sponsor and service provider wants and needs to know. Alternatively, would you like to help plan participants create better savings strategies? You can buy Mr. Carosa’s latest book Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort right now at your favorite on-line or neighborhood book store.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.