Most Employees Don't Feel Financially Prepared for Retirement
Although the U.S. economy is strong and the stock market continues to rise, most employees are worried about the future.
Purchasing Power, a specialty e-retailer for organizations, reports that 87 percent of full-time employees or their spouses are stressed about their finances — with insufficient retirement savings near the top of the list. MassMutual, a mutual life insurance company, found similar results. Its surveys reveal about 72 percent of employees agree they haven't saved enough for retirement.
When you consider that the National Institute on Aging estimates the average 65-year-old man who retires will need at least enough money saved to last 17 years; and the average woman will need 20 years' worth of savings, it's obvious how important it is for employees to plan for their retirement seriously and early.
You, as an employer, can help your employees avoid retirement saving mistakes and get on the right track. Here are a few things you can do.
Employee Problem: Saving too little.
Employer Solution: An employer-sponsored 401(k) is a great way for employees to save. An employee's contributions are automatically deducted from their paycheck (what they don't see, often isn't missed). Plus, if you match an employee's contributions up to a certain amount, their retirement savings increase even more quickly.
Some employers automatically enroll their employees into a 401(k) to ensure that they are saving for retirement. For instance, employers could deduct three percent of an employee's income the first year and then step it up by a set percentage the following years. The Pension Protection Act of 2006 requires employers to apply the deduction uniformly to all employees covered by the plan and the deduction must not exceed 10 percent of an employee's salary. Employees have the option to opt out.
Employee Problem: Poor investment decisions.
Employer Solution: An employer can arrange for employees to meet regularly with a financial advisor who can ensure that the employees have a diversified portfolio. The advisor can help an employee set their financial goals and recommend specific steps.
It's easy for some employees to focus on maximizing their returns — particularly if they're trying to catch up on savings. It's better for employees to spread their investments over a variety of funds — such as index, balanced, equity and global — for a combined, lower level of risk.
Employee Problem: Forgetting about taxes.
Employer Solution: Again, this is an issue where a financial advisor's advice can come in handy. Some retirees have a higher tax rate when they retire. Fortunately, there are ways to minimize taxes. One option is to invest in Roth accounts. With a Roth IRA, an employee pays taxes when they contribute, but can withdraw money tax free once they retire.
Also, distributions from taxable retirement accounts can be timed to when the employee has the lowest income, and therefore the lowest taxes.
Employee Problem: Saving sick leave days to pay for retirement.
Employer Solution: Employers can limit how many sick days employees can accumulate or suggest other methods of payment besides cash.
An attorney for the city of New York received $21,779 after stockpiling 120 days of sick leave and 135 vacation days. He's not unusual. Many employees save unused days as a way to boost their retirement savings. Unfortunately, the Internal Revenue Service treats benefits as taxable income in some situations, even if the employee doesn't receive the benefit as cash.
As an alternative, an employer can set up an employer-sponsored health reimbursement account that allows participants to use the payout to pay for health insurance and other qualified medical expenses. Tax exempt organizations also can set up a tax deferred 403(b) investment plan and government agencies can set up a IRC Sec 401(a) and deposit the money there if the employee doesn't plan to use the money for health care.
Employee Problem: Taking money out of a 401(k) for current expenses.
Employer Solution: Employers can encourage employees who are under age 59½, and who use their retirement money for emergencies, to pay the money back within a specified time. If they don't, they will owe a 10 percent federal penalty tax, as well as regular income tax.
PwC (PricewaterhouseCoopers), a multinational professional services network, conducted a 2018 Employee Financial Wellness Survey and found that not having enough set aside for an unexpected expense is the number one cause of financial stress for employees.
If employees decide they must withdraw retirement money before their retirement age, they won't have to pay income tax if they return it within 60 days — and if they only do that type of rollover once a year.
Check with your broker, but you might be able to institute rules that limit what sources employees can withdraw from or not allow access at all until termination or until they reach a certain age. You also could treat a withdrawal as a loan. Employees would have up to five years to repay their loan amount and have even longer if it's used to purchase a principle residence.
To discuss ways to help your employees get better prepared for retirement, please contact us.
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