Planning for retirement looks a lot different today than it did for previous generations. Just a few decades ago, folks in their golden years relied on a three-pronged retirement strategy: Use their “guaranteed” pension income and Social Security benefits for living expenses, augmenting that income with earnings from investment portfolios.
Things are different now. Private-sector pensions have become a relic of the past, while funding issues are causing the Social Security Administration’s reserves to diminish. A 2022 report estimates that retirees could receive just 77% of their Social Security benefits by 2034 unless Congress takes action.
With pensions and Social Security in peril, that leaves investment earnings as the key consideration for employees saving for retirement. Most employers offer financial wellness benefits like 401(k) accounts (94%) and Roth 401(k)s (68%) these days. These defined contribution plans place more responsibility in the hands of employees in terms of investment selection and contributions.
As a result, modern-day retirement planning heavily favors savvy investors and folks who have more disposable income. But what about employees who don’t know how to play the stock market — or simply don’t have the funds to do so?
Why Many Americans Aren’t Ready for Retirement
One-quarter of Americans currently have less than $10,000 in retirement savings, but it’s not because they don’t see the value in retirement planning.
Case in point: 82% of employees told the Society for Human Resource Management that they view retirement planning vehicles as an essential financial wellness benefit. More likely, employees aren’t maximizing their 401(k) accounts because they don’t have the budgets to do so. Various factors, including high out-of-pocket healthcare costs and inflation, are hurting employees’ financial well-being and impacting their ability to save for retirement. Per The Penny Hoarder, 17% of Americans are saving less money for retirement now than they were before COVID-19.
There’s also the issue of increased life expectancy. On average, Americans are living longer than the generations that preceded them. According to data from the Social Security Administration, about a third of 65-year-olds today will live into their 90s, and another 14% will celebrate their 95th trip around the sun. In comparison, a 65-year-old man in 1960 was anticipated to live to 78; a 65-year-old woman was expected to live to 82.
Now, consider how these two issues — depleted savings and an increased lifespan — merge to throw a wrench in retirement planning for most people.
People are enjoying retirement longer than they once did, so the rule of thumb for retirement savings and withdrawals must also change. Gone are the days when pulling out 4% of a fund’s principal every year would be a surefire way to make your money last for more than 30 years.
The heyday of pensions saw plenty of retirees move their investment capital into conservative funds — like those focused on bonds — as a way to lower their risk and retain funds. Today, however, Americans likely need to keep at least a portion of their capital in more aggressive growth funds to ensure inflation doesn’t obliterate their gains.
How Employers Can Help With Retirement Planning
One way companies can help their employees prepare for retirement is to offer a partial or full company match on 401(k) contributions. While they’re at it, it’s a good idea to invest in educational opportunities. That might include bringing in experts to host lunch-and-learns on different investment options, such as mutual funds. The stock market can be intimidating, so these sessions need to be judgment-free zones where people feel comfortable asking any questions they might have.
Finally, consider providing auxiliary financial support. Deductibles, copays, and other healthcare-related costs, for instance, can put a serious financial squeeze on employees. And as people age, their healthcare expenses will only grow.
In 2022, a retired couple aged 65 will need to save up roughly $315,000 to cover their medical expenses in retirement. Workers on qualifying health plans would be wise to invest funds into a Health Savings Account (HSA) today for the health expenses they will face decades in the future. But how can they afford to set aside money in an HSA while also contending with unexpected health expenses? With a Health Payment Account (HPA).
An HPA is a new type of benefit that enables employees to access and afford care. This account gives employees a direct line to healthcare funds when they need help — no questions asked.
Employees are eager to understand their retirement planning options so they can make the best decisions for themselves and their families. Employers are in a position to help — but they can only make an impact by investing resources into promoting financial wellness in the workplace.