Nearly all recordkeepers and advisors have a variety of measures of participant retirement readiness. A variety of assumptions are made in these calculations. They may include projected social security benefits, income (compensation) growth and investment returns. They provide a variety of projections including retirement income and income surplus or deficit amounts.
When you dig into the assumptions, there may be considerable variability in targeting an industry standard 80% income replacement. Over a long horizon, a small variance in actual vs. projected market returns can have a major impact on a participant's ability to retire comfortably. Likewise, who can be certain what social security benefits may look like 10, 20 or 30 years in the future?
A simpler approach to gauging retirement savings is often used in retirement industry literature. This approach simply looks at a participant’s balance as a multiple of compensation with respect to their age. For example, Fidelity Investments offers the following guidance:
- In your 20s, put enough away so that by the time you turn 30, you'll have the equivalent of your salary saved.
- By 40, aim to have three times your salary saved up;
- By age 50, you should have enough saved to equal six times your salary;
- By age 60, your savings should be eight times your salary;
- And 10 times your salary by the full retirement age of 67.
These measures are simplistic, but they do not involve a myriad of assumptions that can skew outcomes over a long horizon. In addition, when looked a graphically, they can provide an easily understandable picture of where a plan’s participants stand on their road to retirement. Put simply, maximizing the slope of participant balances versus their income may help lead to successful outcomes.
There are many ways plan sponsors can go about this. Most simplistically, a focus on participant education and the importance of saving for retirement can help. Other potentially more effective means of helping to improve outcomes include:
- Implementing automatic enrollment to increase participation and hopefully retirement savings rates.
- Increasing auto enrollment percentages.
- Use auto escalation to increase contributions. Consider increasing employees contributions by 1% per year up to 10%, thus encouraging a savings rate in the recommended 10%-15% range.
- Use a “stretch match” to encourage higher retirement savings rates. Rather than a 100% match up to 3%, move to 50% up to 6% or higher.
- Increase employer contributions through a higher match or profit sharing.
At the end of the day, a combined effort between increasing employee and employer involvement in fostering retirement savings practices is necessary to empower participants to take control and retire comfortably. For more information, contact Sentinel Benefits & Financial Group to discuss your plan’s goals and structure.