Retirement Planning Questions are not only for the Plan Sponsors. Recently, BenefitsPro has identified 5 key questions that the Employees should be asking!
Employees don’t always know what to do when it comes to making the most of their 401(k) plans at work. Employers can help them get it right while maximizing employees’ retirement readiness.
Employees don’t always know how much they’ll need to retire comfortably, even though that’s what they want. They need guidance, and that’s where employers and financial wellness programs come in—to help them figure it all out. Employers often underestimate their importance in this regard, but employees want, and need, help to know the right questions to ask to understand retirement planning and how to prepare appropriately.
According to a recent BenefitsPro article, here are the five retirement planning questions employees need to ask when it comes to preparing for retirement. What can employers do? Deliver the message, in the right way, of course. On-demand videos, online training, webcasts, podcasts, and targeted messages to participants are some of the ways employers can help employees prepare and save sufficiently for retirement.
Question #1: How much money do I need for retirement? Prevailing financial advice wisdom says that today’s employees will need 80% of their pre-retirement income to live comfortably in their post-working years. The numbers vary. T. Rowe Price, for example, estimates 54%-87%, according to BenefitsPro, and most retirees come in below 70%. Some retirees have paid off mortgages before leaving the workforce, and others stop saving for retirement when they stop receiving a steady paycheck. These factors can account for the variance and bring the percentages down.
Question #2: How much should I save before I retire? General personal finance advice says 10 times a worker’s annual salary, averaged over several years. This is because some people choose to accumulate as much overtime as possible as they head into retirement. Fidelity Investments recommends having eight times one’s annual salary by age 60 and 10 times by retirement. As far as savings rates go, 10-15% is the generally recommended amount most workers should set aside for as long as possible.
Question #3: What is a “safe” withdrawal strategy? This addresses many individuals’ concerns about outliving their retirement assets. Running out of money is a scenario no one wants. However, personal assets may not be the only source of retirement income. Some may also rely on Social Security, a pension, or an annuity for additional sources, for instance. However, these assets may not be enough to meet an individual’s retirement income needs. As far as withdrawal rates go, most financial professionals say that 4% per year is a generally “safe” withdrawal strategy. BlackRock suggests 4% in the first year, followed by 2% annual increases in future years. These situations are highly personal, and withdrawal strategies may be best guided by input from a financial professional to help retirees maximize their savings while ensuring they have enough to live comfortably throughout their retirement years.
Question #4: How long will my savings need to last? Again, the answer to this question is highly personal and depends on a variety of factors. An important factor is an individual’s anticipated longevity. Most experts agree that retirees should aim to make their assets last to age 83—the average life expectancy for a 65-year-old American, according to the Centers for Disease Control and Prevention’s 2021 data, cited in BenefitsPro. Other factors include whether an individual lives in a city or a rural area, if they smoke, and their genetics, all of which play a role in longevity, a key factor in retirement planning.
Question #5: What do I do if I haven’t saved enough? This is a big question that many workers have about retirement planning. Catch-up contributions, which are allowed for individuals over age 50, and redirecting financial assets to income-producing investments can help near-retirees get closer to their goals. In 2023, individuals over age 50 can add catch-up contributions of $7,500 to their 401(k). Using a 1035 exchange on a life insurance policy to provide retirement income is another option. In addition, individuals may consider using outside financial assets to fill retirement income gaps, or downsizing or moving to an area with a lower cost of living.
Generally, the earlier employees start saving and planning for retirement, the better prepared they’ll be. Early intervention and effective communication from employers can help, along with guidance and engagement with financial professionals to help employees prepare for retirement based on their individual financial situation and goals.
