Improve Retirement Readiness in 5 Steps
Improve retirement readiness with these 5 Steps offered from Kellogg School of Management. Striving to Improve retirement readiness, is not a new issue in America, but it is an issue that still very much needs to be addressed, preferably sooner than later. It takes a financially sound and forward-thinking company to offer a 401k retirement plan, but to take a workforce to a fully funded retirement status it normally takes an educated retirement committee. Americans benefit when the retirement committee members focus on wanting to improve retirement readiness among all plan participants.
According to a new study from the Kellogg School of Management at Northwestern University, cited in MarketWatch, even participants in the country’s best corporate retirement plans may fall short of their retirement readiness goals. In fact, three out of four participants in these plans will not have enough money set aside to cover their living expenses in their post-work years. The Kellogg study tracked millions of accounts overseen by Edelman Financial Engines for almost 300 public and privately held companies.
According to Enrichetta Ravina, a visiting professor at Kellogg and one of the study’s four authors, the retirement readiness benchmark for their research was the following: Would retirees have enough, including their Social Security and Medicare benefits, to fund 80% of their pre-retirement income, plus retiree medical expenses, which according to the latest estimates from Fidelity, are $285,000 for a couple?
The Kellogg researchers discovered that the answer to their question is a definitive no. In fact, not even close.
The article’s author, columnist Howard Gold, opines, the study confirms what he has believed for a long time. No matter how good the retirement plan, Americans don’t save enough to achieve retirement readiness because they believe they cannot afford to. Others don’t have access to a workplace retirement plan because their employers do not offer one. According to data from the U.S. Census Bureau quoted by Gold, only about a third of Americans is saving in a company retirement plan. That explains some of America’s shortfall when the discussion shifts to workers failing to improve retirement readiness on their own.
Americans need more guidance and advice when it comes to investing for retirement. Instead of putting money into stocks or mutual funds within the plan, many today are putting retirement funds into highly volatile, risky investments they don’t understand, like cryptocurrencies and cannabis, writes Gold.
Gold applauds automatic enrollment and qualified default investment alternatives (QDIAs) like balanced and target date funds, calling these and the Pension Protection Act of 2006, which brought them about, a boon for the call to improve retirement readiness because it combats laziness and inertia.
For her part, Kellogg visiting professor and study co-author Ms. Ravina offers this five-point plan for lawmakers, participants, and employers to help improve retirement readiness in America:
- Employers should increase matching contributions, to at least 3% of employees’ salary, but 5% is better because it gives employees more incentive to save.
- The government should limit early withdrawals from retirement plans. Loans and other pre-retirement withdrawals reduce the total savings workers will have at retirement. They also prevent the savings that is withdrawn from benefiting from compound interest and growing over time. In addition, participants who take the money out before age 59 1/2 face tax consequences, plus a 10% early withdrawal penalty. Ms. Ravina advocates upping the early withdrawal penalty age to 65, which would make it harder for older workers to tap their retirement savings earlier than necessary and thus, improve retirement readiness.
- Of course, workers should start saving for retirement as early as possible. Ms. Ravina advises employees pay off debt first, then begin saving for the future as soon as they are ready.
- Similar to number 2, workers should avoid early withdrawals, and instead, borrow money from a relative or pretend the money doesn’t exist; in short, do whatever they have to do not to touch their retirement savings except in extreme emergencies. In addition, when workers change jobs, they should roll their savings over to an individual retirement account (IRA) or their new employer’s retirement plan rather than cashing it out. Encouraging more rollovers will also help to prevent plan leakage — a common challenge for plan sponsors.
- Finally, to improve retirement readiness, participants should keep a reasonable amount of their portfolios in stocks, and not try to time the market. Ms. Ravins endorses target date funds because they take the guesswork out of investing, and they automatically rebalance over time as participants near retirement. As such, she believes the majority of retirees’ money should remain in target-date funds, or in other, similar stock-bond allocations.
In addition, retirement plan participants need to be reminded to keep their emotions in check when it comes to investing for the long term, even if the market crashes. According to Gold, “The average baby boomer in a Fidelity workplace plan in 2007 who didn’t sell but instead continued making regular contributions saw her balance nearly triple by June 2017. Those who sold in 2008 or 2009 still hadn’t caught up nearly a decade later.”
As Gold notes, academic studies tend to be “abstract and obscure,” but the Kellogg study offers common-sense solutions to America’s worsening retirement woes. These suggestions are not new, of course, but they are oft repeated for a reason — they are an effective way to help improve retirement readiness among American workers. However, these retirement readiness solutions cannot be implemented in a vacuum. It will take focused efforts on the part of legislators, workers and employers to bring them to fruition and achieve results.