EBRI defines adequate retirement income as having enough money to fund basic expenses in retirement. Based on this definition, approximately 44% of boomers and Gen Xers are at risk of running out of money. [1. Nevin Adams, “Impact Ed,” EBRI.org, Feb. 22, 2013. ] Clearly, we have a retirement income crisis on our hands.
One of the main drivers of this crisis is low deferral rates in 401(k) plans. The average starting deferral rate has hovered at 3% for years — while experts recommend at least 10%. Deferral rates need to be higher because a participant's savings rate determines their real retirement age — that’s the bottom line.
There’s a sense of urgency associated with getting people to save more because it’s estimated you need 11 times your salary at retirement to ensure that your income lasts a lifetime. For example, Social Security reports the average person makes $42,979.61. That means they should have $472,775.71 in their retirement account when they reach retirement age. And yet the average 401(k) holds just $40,900. [2. 2012 SPARK Institute MarketPlace Update.] So unless these folks have alternate sources of retirement income, they have some serious planning and saving to do.
The good news is that 70% of participants in the latest Retirement Confidence Survey said they should be saving at least 10% for a financially comfortable retirement.
In addition:
• Participants can save more. Another recent survey [3. State Street Global Advisors (SSgA), the asset management business of State Street Corp., July 2012 survey of participants.] found:
— 64% have room to save as much as 10% more;
— 83% could cut their household budget by 5% in order to save more for retirement; and
— 52% would be willing to increase their savings rate to as high as 10% if they had a 1% auto deferral increase each year.
• Plan sponsors are starting to take a greater interest in preparing participants for retirement. A recent study [4. Deloitte 10th Annual 401(k) Benchmarking Survey.] found:
— retirement readiness was their top priority; and
— 64% believe their responsibility includes taking an interest in whether employees are tracking toward a comfortable retirement.
As an advisor, you’re in a unique position to help solve the retirement income crisis in this country by encouraging higher deferral rates at the plan sponsor and participant level. It’s time to take action. Ask the right questions and help plan sponsors focus on controllable things with the biggest impact on retirement readiness:
• Help with goal setting and a holistic financial plan
• Starting with at least a 6% deferral rate (more if possible)
• Auto escalation to the appropriate maximum (depending on the plan’s needs and demographics)
• Auto enrollment (for maximum participation)
• QDIAs, age- and risk-based diversified portfolios, [5. Diversification does not guarantee a profit or assure against a loss.] guaranteed income products and overall good fund lineup (from quality provider partners).
For more information or a copy of my latest thought leadership presentation, “Asking the Right Questions,” contact me at [email protected].
George Revoir is senior vice president of distribution, responsible for distribution and intermediary services in John Hancock's Retirement Plan Services business.
This information does not constitute legal or tax advice with respect to any taxpayer. It was neither written nor intended for use by any such taxpayer for the purpose of avoiding penalties, and it cannot be so used. If it is used or referred to in promoting, marketing, or recommending any transaction or matter addressed herein, it should be understood as having been written to support such promotion, marketing, or recommendation, and any taxpayer receiving it should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
Group annuity contracts are issued by John Hancock Life Insurance Company (U.S.A.) (John Hancock USA) (not licensed in New York). In New York, products are issued by John Hancock Life Insurance Company of New York (John Hancock New York). NOT FDIC INSURED | MAY LOSE VALUE | NOT BANK GUARANTEED | NOT INSURED BY ANY GOVERNMENT AGENCY
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