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Most Americans are not prepared to retire by 65.
The reasons for this are plentiful, and the remedy has eluded many. If Einstein’s definition of insanity remains trying the same thing over and over and expecting a different result, then the current U.S. retirement system is nuts and something’s got to give. We need to be willing to reimagine retirement planning to first tackle hardworking Americans’ short-term financial needs and thereafter, provide practical and accessible programs that help these same people prosper during their golden years. Like most worthwhile pursuits, this is easier said than done.
Shuffling the cards
Reimagining our current system will require reprioritizing. A shuffling of the cards. Turning the pyramid upside down. Why? Because our existing long-term financial savings system is broken and not meeting the needs of Americans. Social Security does not offer the level of financial security it once promised. Stringent funding rules forced employers to move away from stable and guaranteed pension plans and replaced them with 401(k) and 403(b) retirement plans. This move shifted the burden of financial literacy and risk to the employee. Adding to the confusion, financial institutions spend millions of dollars marketing financial products that are not appropriate for everyone.
The result? Americans are being set up to fail. The current system focuses primarily on less effective, short-term, optional retirement savings plans. The fact that people can opt out of a 401(k) plan implies it isn’t important. And even those employees who choose to contribute to a retirement plan are met with the paradox of choice: How much to defer? What investments to make? When to begin taking distributions? Is a loan or hardship withdrawal prudent? There are no less than seven weighty decisions before they invest $1.
Today’s arrangement is incumbent on people making educated, disciplined and future-thinking financial decisions. However, that expectation is unrealistic when the majority of Americans are living paycheck to paycheck and face ongoing economic and labor instability. These people are focused on their immediate financial needs such as credit card debt, affordable housing, child care, living expenses, student loans, and healthcare expenses, leaving retirement savings as a distant afterthought.
There is, however, a silver lining and employers play a vital leadership role to help kick-start our retirement system’s transformation.
First, focus on today
Before a person can save money, they first need to achieve short-term financial security. Employers who sponsor successful retirement programs recognize this and know that financially secure employees are easier to find, keep and are more productive workers.
A primary focus on financial literacy is necessary to ensure workforce members are able to meet their immediate anticipated and unexpected financial needs. Either directly, through financial wellness vendors, or other partners, employers should offer easy to use and access financial education and personalized tools that address topics such as emergency savings, debt management, financial coaching, caregiving, homeownership, expense budgeting, healthcare navigation, trust and estates, and more. Since different demographic populations face different financial challenges, employers should customize these programs to address the needs of their workforce population.
Much like health-focused wellness programs, some employers offer financial wellness programs aimed at encouraging employees to engage in their own financial health. Some of these programs offer incentives to participate or when a person meets self-imposed goals. Getting started is often the most difficult step, and incentives such as seed dollars or matching programs can make all the difference.
Properly armed for tomorrow
Financially secure individuals are better equipped to make the decisions needed to properly save for retirement. Once that pivot has occurred, employers should continue to support their people with clearly communicated and user-friendly retirement benefit programs that offer decision support tools and resources. Financial check-ins are also important, to account for changes in a person’s financial situation (e.g., marriage, birth, promotion, raise, inheritance, home). This will help ensure both short and long-term goals are being met.
Retirement is the encore to the employee life cycle. Short-term financial security is the employee life cycle’s foundation. And that foundation will impact whether an employer is able to attract and retain the talent it needs to thrive. Unless that foundation is built on solid ground, what lies ahead will be shaky for everyone.
Jonathan Price is national retirement practice leader and senior vice president at Segal, a benefits and human-resources consulting firm.
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