People are living longer than ever before thanks to rapid medical advances, broad standard of living improvements, and a growing public focus on healthy lifestyles. Although that is all great news, it could also wind up creating a situation where many Americans have to fund retirements that are longer in duration than the number of years they spent in the workforce. One of the best ways to prepare for this potential old-age financial risk is to start saving for retirement as soon as possible. For example, Stash and Investor’s Business Daily recently highlighted how setting aside just $20 a week can balloon into $173,000 over a 40-year period. Only $41,600 of that figure is actually generated from contributions, while the rest is achieved through historically modest investment returns. Forty years may seem like a really long time horizon but it is easily achievable for anyone who starts saving for retirement in his or her twenties.
Further, the $173,000 figure likely will not be enough for someone to comfortably live on in old age but it is a large enough sum of money to demonstrate how just a small boost to a person’s rate of saving can have a significant effect on their overall retirement nest egg. Too many people, though, procrastinate when it comes to setting aside money, and even more fail to periodically raise their contribution rate. Fortunately, lots of employers are helping address these issues through the use of automatic enrollment and auto-escalation, two plan features that force workers to be more prudent with their retirement preparations. Just look at an earlier study by the Transamerica Center for Retirement Studies, which found that 41 percent of surveyed large companies said that they have incorporated automatic enrollment into their 401(k) plan design (18 percent of micro companies with 10 to 99 employees reported doing the same). Among plan sponsors with automatic enrollment, the median default contribution rate was 3 percent even though many industry experts believe that this is inadequate for funding an individual or family’s retirement.
Automatic escalation can help address this problem and 43 percent of large companies reported that they automatically increase their participants’ contributions annually, compared to 26 percent at both micro and small non-micro companies (100 to 499 employees). Workers clearly like such plan features because 71 percent of surveyed employees said that they find the idea of being automatically enrolled in a 401(k) or similar retirement plan appealing, and the median worker respondent reported that they would be comfortable with a starting contribution rate of 6 percent. Moreover, two-thirds of surveyed employees said that they would be likely to take advantage of an automatic escalation feature that would regularly raise their annual contributions by one percent of their salary. The report’s authors argued that such responses should encourage plan sponsors to adopt automatic features that can help drive up savings rates among employees.
Sources: Stash, Investor’s Business Daily, TCRSPost author: Charles Couch