Retirement Readiness – 6 New Ways to Think About It. Conventional wisdom about saving for retirement no longer applies, according to a recent Motley Fool article. Apparently, that’s what’s tripping up a lot of workers today, and causing them to worry quite a bit about running out of money in retirement. In fact, not having enough money to last them their entire post-working lives is a top fear among many older Americans — a fate worse than death. So how do you educate your participants about planning and saving for their future?
The basic answer is: tell them to throw everything they’ve ever been told about retirement savings out the window. Well, okay, don’t tell them that, exactly, but Motley Fool presented six facts your participants — and possibly you — might not know about saving for retirement:
- The 10% rule won’t cut it anymore: With life expectancies on the rise, healthcare costs through the roof, and investment returns projected to be lower than average, educating participants to save 10% of their income is no longer realistic. Fact is, today’s workers should be setting aside closer to 15-20% of their income to create adequate retirement income. However, the sad truth is that most are saving more like 6.2% of their income, the Motley Fool noted, citing Vanguard’s 2016 How America Saves survey.
How can you help workers make up the difference? For one, educate them on fundamental financial wellness strategies, such as cutting unnecessary expenses like extraneous subscriptions, or meal planning to save on their grocery bill, for example.
- $1 million isn’t a magic number: A popular figure for so-called “sufficient” retirement savings used to be $1 million. Now, the average American will need savings way beyond that to live comfortably in their post-working years. Motley Fool points out that in seven states and Washington, D.C., $1 million will last less than 20 years. Bottom line: Your employees should set their sights on a savings goal higher than $1 million if they want to live comfortably in retirement, especially in more expensive locales.
- The 4% rule is outdated: The standard withdrawal rate for a retiree used to be 4% of their savings per year, and that used to be enough. That’s no longer the case. Once again, thanks to longer life expectancies and relatively low-interest rates, 4% may be an over-estimation. As far as participant education goes, the average worker needs to think instead about required minimum distribution (RMD) rules to project withdrawals based on life expectancy or determine the amount of money they’d need to purchase an annuity to provide them with their desired retirement income.
- Seniors will spend more than they think: A popular myth is that retirees spend less in their post-career years. In reality, however, they end up spending more due to travel and other expenditures, especially involuntary ones like medical costs. Rather than planning for 80% of income in retirement, consider educating participants to aim for more like 100% of income, and communicate the benefits of using a health savings account (HSA) to set money aside for future medical expenses.
- Withdrawals aren’t always voluntary: While your employees’ best-laid plans may include keeping their money invested for the long haul, sometimes that isn’t always feasible. At age 70 1/2, they must take required minimum distributions (RMDs) or face penalties. Encourage retirement plan participants to learn about RMDs and plan for them accordingly.
- Taxes are a certainty: They say only two things are certain: death and taxes. The latter is almost certainly a given in retirement. Most workers make pre-tax contributions to their retirement account during their career — that means they may face a hefty tax bill when they’re ready to withdraw that money at retirement. Participants should be reminded that they must account for taxes and consider alternative solutions to manage them, especially if they find themselves in a higher tax bracket when they retire.
These six retirement realities are important to communicate to participants so they can plan and prepare for them long before they’re ready to give up their 9-to-5 gig. The beliefs we held about retirement readiness don’t apply anymore, and it’s time to embrace a new, more realistic paradigm. Times have changed, and so should our attitudes and methods of approaching retirement planning. That starts with you and how you choose to educate your participants. Hopefully, this article will help you take that critical first step.
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