Insuring Retirement Readiness[By: Robert DeVries]
I have previously written about The Power of Automating Your Retirement (Auto 5) to help improve the retirement lives of your employees. These Auto 5 tools are:
- Automatic Enrollment
- Automatic Qualified Default Investment Alternative
- Automatic Escalation
- Automatic Re-enrollment
- The Stretch Match
I have also stressed that by creating smart savers, your employees will better understand how they can use their 401(k) plan to help bridge the gap from what they have now, to what they will need to have to live the life they desire in retirement.
But how will you know if these features are having a positive effect on the retirement lives of your employees? By measuring the Four Pillars of Retirement Readiness:
- Portfolio Allocation
- Savings Rates
- Years to Retirement
- The Income Replacement Ratio
Portfolio Allocation: Here we measure how employees are investing. We are looking at whether they are properly diversified for their age. We would be concerned to see employees who are either investing only in one or two funds or are over-weighted in their asset allocation selections. We’re going to measure portfolio allocation by specific age groups: 20–30, 30–40, 40–50, 50–60, and 60 through to retirement.
Savings Rates: We measure everybody’s savings rates by age group. We may find that younger people are saving less than are older people, or vice versa. We may want to roll up our sleeves and do meetings for particular age groups to talk about the power of compound interest and why they’d want to save more while they’re younger, as opposed to waiting until they’re older.
Years to Retirement: Here we focus on measuring how close people are to retirement and whether they have saved enough. We can then design education meetings to encourage those individuals who may need to “catch up” on savings. For example, anyone over age 50 can contribute an additional $6,000 (in 2016), known as the catch-up provision.
The Income Replacement Ratio: In the fourth pillar of readiness, we calculate each individual’s income replacement ratio. We then create education sessions that teach employees about specific income replacement ratios and how increasing their contributions by just 1 or 2 percent a year (Automatic Escalation) could easily get them back on track to saving enough money.
By evaluating these four pillars of retirement success by age groups, we can then customize educational meetings to target the groups that need the most education.
Let us know how we can help you be sure the investment you have made in creating your 401(k) plan is captured and optimized in the lives of all that will use it.
If you would like a FREE copy of a Retirement Readiness Report, or would like us to prepare one specifically for your 401(k) plan, please contact us at firstname.lastname@example.org and say “Please provide a sample Retirement Readiness Report or contact us to create one specifically for our company sponsored 401(k) plan.”
Robert DeVries is a WealthCoach™ and Retirement Plan Specialist at FirstWave Financial™. He also holds a CRPS® designation.