Does Retirement Readiness actually mean anything?
We keep hearing about Retirement Readiness...but is it another craptastic invention of my industry or something we should pay attention to?
The concept is simply this: if we expect for people to retire someday, then we need to put special emphasis on making sure people CAN actually retire. (The inverse is why offer a retirement plan to your employees if it won't get them to retirement?)
As a way of measuring this, the retirement plan industry has put together stats and reports to help plan sponsors see if their employees are on track to retire or not, how "healthy" their plan is from this standpoint, and then what can be done to help move the needle. After all, employees are now in charge of saving to create their own paycheck; gone are the days of the pension.
This is simultaneously great and horrible!
It's great because we retirement plan advisors love a new way to talk with plan sponsors and show where we can help improve the plan. It's also great because we DO need to help people get to retirement or we shouldn't bother offering these plans! We don't want a bunch of senior citizens living in poverty.
It's horrible because the data is garbage in --> garbage out. The metrics are usually based on replacing 80% of someone's working pay, sometimes account for Social Security and sometimes not, ignore whether or not anyone has outside assets, and often aggregate all participants together rather than viewing them as individuals.
The problem? There's really no good way to generate an accurate report of this nature. Social Security is really Social Insecurity at this point with the looming crisis, so those under age 40 can't rely on receiving 100% of the benefits promised. Folks who are in higher income brackets likely don't need to replace 80% of their working income. Those who have made the same amount throughout their career are going to adjust better than those who experienced lifestyle creep as their income rose. The reports ignore job-hopping; today's worker won't work for you for 40 years. Many employees have retirement account balances hanging out in other plans or IRAs and these reports don't know about those. And don't get me started on the probability of investments performing to employee's expectations -- many would rather invest more aggressively than have to save more.
Nevin Adams, Chief of Communications and Marketing at American Retirement Association, always writes a good blog. (I suggest you follow him on Linkedin or napa.com!) In this article, called 5 Things You Need to Know about Retirement Readiness, he takes a deep dive into the statistics to help frame the conversation. 3 of the 5 + my thoughts:
When it comes to saving for retirement, Social Security matters for lower income individuals. It will replace a large chunk of their working pay (as much as 57%) and it's hard for them to save high amounts on their own...because they don't make a lot. Saving 10% into their 401k is likely not going to happen. This means that we need to get Social (In)security figured out.
Average/median savings amount in the abstract tell you very little about retirement income adequacy at an individual level. Everybody has their own idea of what retirement means. Traveling the world costs a different amount than kickin' it with the grandkids in rural America.
Pre-retirement income (or a percentage thereof) may not be a reliable proxy for post-retirement needs. I know you have to choose something to measure by, but again, when you lump everyone together and state that they all need 80% of their working income in retirement without knowing their plans, that doesn't do anyone any favors.
If you want more information and insight into how much your employees should be saving for retirement, here's a thoughtful white paper from Dimensional Fund Advisors. Again, garbage in/garbage out, but these days we're using a combination of sources to take a different approach with our clients in helping frame the conversation when making design, match, or profit sharing decisions, or how to best educate employees.
Don't talk trash to the garbage around you. Need help with figuring out what Retirement Readiness means to your plan? Reach out here!