How Much to Save for Retirement is a Question that Puzzles Most Employees
How much to save for retirement? For most, this question may never have an answer. Americans are more optimistic than ever about their retirement readiness, but they’re also feeling the sting of regret when it comes to not planning for their futures sooner. A new study from Schwab Retirement Plan Services reveals that if they could travel back in time, two out of three retirement plan participants would sacrifice past spending on things like dining out, expensive clothing, new cars, and vacations to save more for their post-working years.
The question of how much to save for retirement now needs to be dovetailed with unexpected expenses like home repairs, and “quality of life” spending. These become top obstacles when saving for retirement. Forty percent of participants cited the former, and 34% cited the latter as their primary reasons for not saving more. Perhaps not surprisingly, 31% said paying off credit card debt prevented them from beefing up their retirement savings. Despite some American’s unwillingness to sacrifice spending on creature comforts to make their lives better, however, how much to save for retirement – a comfortable retirement – is the top source of financial stress for participants (40%). By comparison, paying off credit card debt placed second, with 25% of participants citing it as a financial stressor.
For most American workers, defined contribution (DC) plans have replaced traditional defined benefit (DB) pension plans as their primary retirement savings vehicle. The Schwab survey responses mirror this phenomenon — 60% of participants say their 401(k) will be their largest source of retirement income. In addition, and no surprise here, the 401(k) is an indispensable workplace benefit. Nearly 100% (98%) of workers save for retirement by investing in their 401(k); outside of their 401(k), 61% said they save for retirement in a savings account. What’s more, 88% of those Schwab surveyed said a 401(k) plan is a “must-have” benefit when looking for a new job.
As more American workers recognize that they are pretty much fully responsible for ensuring their comfort in retirement, they are also looking for actionable advice to help them achieve their goals. Eighty percent of respondents to the Schwab survey said their 401(k) is in better shape than before, but 71% said they’d like personalized investment advice. Moreover, participants are much more confident in their ability to make good 401(k) investment decisions with the help of a financial professional (77%) vs. doing it themselves (50%), and more than half (52%) of participants said they expect better investment performance with advice.
In addition, participants want help with retirement planning, Schwab found. Just over half of participants (54%) are likely to know how much they should have saved for retirement, while a majority (91%) knows their ideal credit score. As such, participants are looking for help when it comes to setting specific retirement targets. The goals they’d like assistance with include calculating how much money they need to save for retirement (43%), receiving advice on how to invest in their 401(k) (39%), determining their retirement age (39%), and figuring out what their expenses will be in retirement (36%).
Schwab surveyed 1,000 401(k) participants online between the ages of 25-70 who were employed at companies with 25+ employees that offered a 401(k) plan, and who currently contribute to their workplace plan. The results indicate a tremendous opportunity for plan sponsors to better serve their participants on everything from financial wellness — especially teaching them how to better prioritize their expenses and “needs vs. wants” to help them save more for retirement — to investment advice to retirement planning strategies. This helps plan participants to get closer to knowing how much to save for retirement. These solutions are relatively easy and inexpensive to implement. Plan sponsors should talk to their current retirement plan service providers about the solutions they have available to help participants meet their retirement goals, such as financial wellness programs and investment advice tools and services. If necessary, plan sponsors can look for and implement tools to help participants learn how much to save for retirement. This is the way the industry is moving, and it behooves plan sponsors not to get left behind.
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