Roses are red, violets are blue, a closer look at your retirement readiness may be overdue.

As Valentine’s Day is celebrated in the US this week, millions of people will crowd the aisles of shopping malls and grocery stores looking for the perfect gifts to celebrate their love and affection for one another.  According to the Annual Valentine’s Day Spending Survey from the National Retail Federation, 91% of Americans who are currently in a relationship will celebrate to the tune of $18.6B this holiday season.1 Isn’t love grand?!

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Think about this…have you put that much time and effort into making sure you are financially prepared for retirement – or you’re at least on track?  According to a recent survey, fewer than 50% of workers have taken the time to determine how much income they’ll need in retirement.  Even more alarming, less than 30% of workers are comfortable that they’ll have enough money to retire!2  We need to change that.

What is retirement readiness all about?

Retirement readiness refers to the degree of which an individual is financially prepared for retirement.  While this figure is different for everyone many experts in the industry agree that you should attempt to target about 85% of your pre-retirement income to maintain your current lifestyle after you retire.3 Social Security benefits are expected to replace approximately 40% of your income in retirement although this number will be much lower for higher wage earners and higher for lower earners.  This means an additional 45% should come from your 401(k) and/or pension plans and other personal savings.

Are you on-track?

Have you considered whether or not you’ll have enough to retire?  Based on our analysis, an individual working a 40 year career needs to save at least 10% of their annual pay each year plus employer contributions in order to reach a goal of saving 85% at retirement.4

What should be done now?

We would suggest you do the following immediately to determine if you’re on track for retirement:

Define your retirement readiness goal – the first step in determining if you’ll be ready to retire is to define what retirement readiness means to you.  It will be different for each individual depending on your goals in retirement which may include paying off a mortgage, traveling or just spending more time with family.  Having a goal in place will make it easier to work towards this goal and be better prepared.

Determine if you’re on track – once you’ve defined your retirement readiness goal, the next step is to determine if you’re on track for retirement.  You should take into consideration all retirement plans offered by your company including the 401(k), pension, IRA as well as personal savings.  Our retirement plan calculator can help.

Increase 401(k) savings rate – If you determine that you’re falling short of your retirement savings goals, there’s still time.  An easy way to improve your chances of being prepared for retirement is to increase your savings rate.  A 1% increase in savings can lead to a significant increase in your account balance at retirement.

Review plan design – Finally, as an employer, you can help to make sure your employees are ready for retirement.  You may consider implementing the following plan design enhancements to prepare your employees: 

  • Automatic enrollment – we suggest plan sponsors implement an automatic deferral arrangement to make sure employees are prepared.  A default rate of at least 6% should be considered.
  • Automatic escalation – in addition to implementing an automatic enrollment provision, we’d suggest you increase a participant’s savings rate in 1% increments each year until they reach at least 10% of pay.5
  • Stretch employer contributions – finally, consider stretching your employer matching contributions to encourage greater plan participation.  If you currently match 100% of deferrals up to 3% of pay, consider changing to match 50% not in excess of 6% of pay.  No additional cost increase but participation will likely be improved.6

So, while shopping for your valentine this year, consider giving them a gift that can celebrate for the rest of their lives – income security at retirement.  It may not seem as sweet as chocolate but they will be thanking you later.  To be on the safe side you should probably still buy some chocolate too.

 

1http://business.time.com/2013/02/11/why-consumers-just-dont-feel-the-love-for-valentines-day/

2http://www.ebri.org/pdf/briefspdf/EBRI_IB_03-13.No384.RCS.pdf

3Assuming pre-retirement annual gross income of $40,000. Aon Consulting’s 2008 Replacement Ratio StudyTM http://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf

4Based on analysis conducted by the Principal Financial Group®, August 2013. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; Social Security providing 40 percent replacement of income; 7 percent annual rate of return; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is 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. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.

5The Principal Financial Group. Data based on a combination of 42,807 participants opting out of Automatic Enrollment or Automatic Increase as of 4/25/13 and 65,662 opting in to Principal Step Ahead Retirement OptionSM as of 3/31/13.

6The Principal Financial Group. Analysis based on 172 contracts that showed a stated match formula. Total contribution percentage includes participant contribution and employer match (as of 12/31/2012).

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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.

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