All around the world, people are not saving enough for retirement. This retirement – or “savings” gap is widening as people make tradeoffs against retirement savings in favor of more immediate needs.
Recent research by Aon shows that only one in three U.S. workers will have saved enough to retire comfortably by age 67. U.S. workers should begin saving 16 percent of their annual pay – including employer contributions – by age 25 to accumulate enough savings to retire comfortably by 67. Instead, workers are more likely to save between 4 and 7 percent and receive an average of 5 percent of pay from their employer. That savings gap means the average worker retiring at 67 would have to cut their standard of living 20 percent from pre-retirement levels to overcome the savings shortfall.
And the savings gap is different according to the income, gender, generation, and industry of the employee. Employers, therefore, need to realize that just as savings gaps differ according to a person’s age, gender and occupation, there is no one-size-fits-all solution. Employers should analyze their workers’ retirement adequacy – or overall retirement readiness – and develop a personalized approach for addressing it. In undertaking this analysis, Cary Grace, CEO, Global Retirement and Investment at Aon, underscores the importance of an organization addressing the overall financial wellbeing of their workforce: “Retirement readiness centers around increased empowerment and overall financial wellbeing. For employees, being able to understand the benefits and programs their employers provide is the first step on the road to retirement.”
To close the retirement savings gap, the most important thing employees can do is start saving more sooner. Meanwhile, as they look to make a real impact on employee retirement savings rates, employers should understand how the retirement adequacy of their employees may vary from the average. In particular, retirement adequacy varies based on five key areas: savings, income, generation, gender, and industry.
Savings: Most U.S. Workers Are Falling Short Of The Mark
An employee’s savings rate is the greatest predictor of whether they’ll be on track for retirement. The average U.S. worker needs to boost their savings an additional 5 percent to be on track.
If there’s good news, it’s that as employees advance in their careers, they typically save more. Also, workers who enroll in an automatic contribution escalation plan in their employer retirement plan tend to save more than those who don’t.
To guarantee real change in their employees’ savings patterns, employers must first identify the gap in their employees’ savings and then lay out plans to:
- Educate employees on the impact of small changes in savings rates
- Create or expand automatic contribution escalation features in 401(k) programs
- Set higher savings targets for matching contributions and contribution escalation
Income: Retirement Savings Needs Vary Significantly By Income Level
Grace Lattyak, associate partner, Retirement Solutions at Aon, states, “While rules of thumb are often used for retirement targets, the targets really do vary greatly by income level.” And in the U.S., she continues, “retiree medical costs can be significant, especially for those with lower income. Combined with tax obligations that change after retirement and Social Security benefits – targets can vary across income levels.”
Generally, the higher the employee’s salary, the higher the savings level. Given the differences in retirement savings and needs by income level, employers can help more employees better meet their retirement savings needs by taking these steps:
- Calculate the gap between what employees are saving and retirement needs
- Craft and deliver targeted messages to employees, communicating appropriate savings targets for each group
- Consider noncontributory employer contributions to help provide retirement income for low-income workers unable to save enough to meet a full 401(k) match
Generations: Younger Workers Face A More Challenging Retirement Environment
As traditional pensions have become less common and employer retirement contributions have decreased, the retirement savings pressures have increased on younger workers.
Adding to the pressure on younger workers is medical cost inflation, which is expected to outpace salary over time. Consequently, today’s 30-year-old workers will have to save more to meet their retirement healthcare costs than their 60-year-old co-workers.
With younger employees expected to take on a greater level of responsibility for their retirement income than the generations proceeding them, additional retirement savings education, tools, and income to savings calculators could provide significant benefits.
Employers also should consider that workers of different generations might have different savings considerations. For example, while younger workers might be focused on repaying student loans, middle-aged workers might be concentrating on putting aside savings for their children’s college educations.
Employers need to make saving as easy as possible for every generation of worker. Online guidance and managed accounts or pre-mixed portfolios such as targeted funds can be helpful.
So that every generation in the workforce can save adequately, employers should:
- Develop communications materials that target younger workers, explaining how they should realistically project their retirement age
- Reduce defined contribution plans costs that are passed on to employees through the careful selection and monitoring of investment options
- Provide financial wellness education and tools that help younger workers budget better and save more
Gender: For Female Employees, The Challenges Are Greater
Women typically face a greater retirement shortfall than their male counterparts.
A longer life expectancy coupled with lower compensation throughout their lifetime creates a larger financial burden over a longer period compared with the needs of male retirees. In addition to earning less, on average, female workers spend more time out of the workforce than do male workers.
To better support their female employees’ retirement savings efforts, employers should:
- Measure the retirement readiness differences between male and female employees
- Develop targeted communications and tools to encourage female workers to save more, defer retirement, and maximize Social Security benefits
- Provide lifetime income solutions to help all employees – particularly women – better manage longevity risk
For both women and men, longevity – and the possibility of outliving one’s retirement savings – is a significant concern. To address the concern, employers should consider how lifetime income solutions can help increase all employees’ financial security in retirement.
Industries: Retirement Savings Adequacy Varies Widely By Industry
Driven by differences in employee pay, benefits, and savings rates, the industry an employee works in can dramatically affect their retirement preparedness. Some industries provide more robust retirement benefits than others, and industries that offer defined benefit retirement plans such as aerospace and energy, typically have better levels of employee retirement readiness than do industries offering only defined contribution plans.
While industry benchmarks can help employers understand the retirement adequacy landscape, it’s essential for employers to:
- Recognize that every employee population is unique and craft custom solutions versus one-size-fits-all approaches
- Develop a total benefits strategy that’s appropriate for their employee population and their position within the industry
Meeting Your Employees’ Unique Needs
On their own, competitive retirement benefits might not be enough to get employees where they need to be in terms of savings. To best help employees prepare adequately for retirement, employers must consider the wide variety of their employees’ needs and craft communications, education, and plan structures that best help their workers achieve their financial goals.
Each employee’s individual retirement savings needs are unique, and each employee population has its own set of characteristics, even among industry peers. Paul Rangecroft, Aon’s practice director, North America Retirement, states, “Employers understand the need to think more broadly about financial wellbeing.” As people make decisions about how to fund all their life decisions – from education to home purchases – such financial goals might detract from their retirement savings. He continues, “Employers are now starting to understand that employees need greater assistance to navigate making the right financial choices on these life decisions.”
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