by Brad Knowles, Heritage Institutional
When 401(k) plans were introduced in the marketplace in the 1970’s, they were designed to allow highly compensated workers to put more money away for retirement. This is because the traditional pension plan was still the dominant retirement plan at employers. Today, 401(k) plans are the primary retirement savings vehicle. The move from pension plan (employer funded) to 401(k) plans (employee funded) means we are now using a wheelbarrow to do the job of a bulldozer.
The word “retirement” is in the news almost every day. Every newscast shows how the Dow, NASDAQ, and S&P 500 performed, but what does it really mean?
- Approximately 8,000 baby boomers turn 65 years old every day.
- Social Security is designed to replace approximately 25% to 30% of a working couples income.
- The average couple will need just over $200,000 to cover their healthcare cost
- 68% of Americans between the ages of 50-64 report their biggest worry being not having enough money for retirement.
For most, it is not a question of if they retire, but how long can they afford to stay retired.
Now comes the good news….
There are ways to make our wheelbarrow work more like a bulldozer. We know that
workers need to put between 12% and 15% of salary away each year. When combined with social security and time, this formula should replace about 75% to 80% of the average workers income, with approximately have of that coming from retirement savings.
We know the average worker is not going to just accidentally start saving 10% of pay. We, as employers, have to be courageous. We have to automatically enroll our employees in the plan. We have to automatically increase their deferral incrementally over time. We also need to change our viewpoint on matching funds. We need to optimize the match to encourage/reward higher deferrals. Optimizing the match means matching 40% to 10% instead of 100% to 4%. If we optimize the match, employees will be more satisfied about increasing their contributions.
Studies show that less than 10% of participants that are automatically enrolled in the plan opt out. Over time, we can change the culture. We would love to see 90% participation in retirement plans, 10% average deferral rate, and 90% utilization in professionally managed investments.
Retirement means many different things to different people. To some it means changing vocations, to others it is not working, and yet to others, it means a time to volunteer. To Heritage, retirement means the opportunity for our clients to have those choices.