Double Digit Deferral Rates May not be Right for All

Like target date funds that have the same investment strategy for everyone born within a five-year period, the retirement industry would have you believe that double digit deferral rates are right for everyone. But according to Hugh O’Toole, founder and principal at Viability AG, a new unit of MassMutual, that may not be true. And though older workers may be a liability costing the company more to insure and employ, it’s not always the case that older employees should retire at 65.

While the vast majority of workers should defer 15% of salary including the match, according to O’Toole, some lower income workers might be better off buying insurance benefits like disability and whole life. Why? Social Security will replace a greater percentage of their income and protection against disasters may be more prudent for people with no or small emergency reserves.

And though some older workers whose “hearts, hands and minds” may not be fully engaged in the job, but are forced to work because they cannot afford to retire could be a liability and distraction, some older workers can continue to be an asset to the company. Hugh’s dad taught math into his 80’s consistently receiving high ratings while enjoying his work. But an 85 year old running a fork lift may not be the optimal situation. Younger workers can get discouraged when older workers who want to or should retire can’t, not just because of the limited opportunities to move up but because of morale issues.

Which all comes down to three things:

  1. One size does not fit all when it comes to retirement for both the company and each of their workers
  2. There’s a limited benefits budget for the company and their workers which needs to be managed carefully
  3. People and company need help from advisors who know how to manage all benefits

Do you have that advisor?

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