Are You Helping Your Participants Become "Retirement Ready?"
By Rich Martin, Assistant Director of Consulting at the Principal Financial Group®
If we asked 10 people what it means to be "retirement ready," we'd likely get 10 different ideas. For example, not everyone agrees on the right age to retire, or how much income they'll need to support the lifestyle they want in retirement.
Start saving — the sooner, the better
One key to becoming retirement ready is for participants to start saving money towards their retirement goals. The level of savings they'll need for retirement is dependent upon when they start saving and the level of contribution made by their employer. The sooner participants start saving, the lower the annual rate of savings they'll need to reach their goal. In addition, the more their employer contributes, the less they'll need to save of their own money.
How much will it take to retire?
To measure whether a participant is on track to be retirement ready, the retirement industry generally uses a target income replacement ratio of 85% of the participant's projected salary prior to retirement.
Based on our analysis, a person whose career spans 40 years will need to save 11% - 15% of their annual pay each year to reach the 85% of pay goal. This savings range assumes that social security will replace 40% of pay in retirement. Higher wage earners may need to save more because they will receive less from social security as a percentage of projected salary prior to retirement. This savings rate does not distinguish between employee and employer money, but rather a total.
Design your plan to help participants be retirement ready
Help your participants to become retirement ready by:
- Making the commitment to offer a contribution. The more you are willing to contribute, the better able your participants will be to meet the targeted savings range of 11% - 15% of pay. If you are unable to contribute the full 11% - 15% of pay to everyone, the most effective way to incent employees to make elective deferrals to the plan is to have a matching contribution.
- Educating participants about the importance of saving for their retirement. The employer's level of contribution may not be enough. Most likely, a combination of employer contributions and personal savings are needed to meet an individual's retirement goals. The rate of savings is important for participants to understand because many employers offer only a single defined contribution plan retirement program.
For more information, contact your local representative of The Principal® today.
- Our View on Retirement Readiness: How to Move from a "Popular" Plan to a Successful Plan. The Principal Financial Group thought capital, September, 2011. The estimate assumes a 40-year span of accumulating savings, as well as the following facts: Retirement at age 65; Social Security providing 40% replacement of income; annual market returns of 7%; annual inflation of 2.5%; annual wage growth of 3.5% over 40 years in workforce. This estimate is based on a goal of replacing 85 percent of salary. The assumed rate of return for the study was hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.