An Advisor Action Plan for Encouraging Retirement Savings

An Advisor Action Plan for Encouraging Retirement Savings

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On the flip side, 48 percent of workers leave the workforce earlier than intended because of disability or health issues, or they were forced to due to changes at their company. Be sure your clients are prepared for the unexpected and know that the road to retirement will likely have some detours.

Point out the easiest ways for your clients to save without having to put much thought into it. Qualified accounts will likely make sense for most of your clients, given their tax-related advantages and the ability to earn “free money” through a company match on a 401(k) plan. But perhaps the most compelling reason is their simplicity. The “automatic” nature of contributing to an IRA or a workplace retirement plan is invaluable.

A recent Vanguard study indicated a 91-percent participation rate for retirement plans that offered auto-enrollment, compared with just 42 percent for plans that don't have the feature! Remember, when faced with difficult decisions, human nature usually dictates that we make no decision at all. Auto-enrollment is just one way to lower the hurdles that plan participants must jump over to start the savings process.

Another important step is to ask your clients to account for all of their essential monthly expenses (in writing or using an online budgeting app) and then compare expenses to their monthly income. Beyond creating a baseline diagnostic of their financial situation, this exercise will force your clients to compare their needs versus their wants, plus give you an opportunity to help them make an emotional connection to their retirement goals.

Does their allocation of money spent versus money saved align with the images that they have presented to you during the client discovery phase? Does their plan to eradicate credit card debt correlate with their hopes for tomorrow’s retirement? Give them that “aha moment” by helping them sort through their current financial habits and putting a plan in place to redirect any extra dollars you’ve uncovered toward their retirement.

Of course, not all of your clients are alike, so you have several factors to consider when applying these strategies. Perhaps the most important one is how close your clients actually are to their retirement age.

Nearing retirement. For those who are closer to retirement and haven’t taken the necessary measures to properly prepare, time is running short. Those with access to a 401(k) plan should beef up their contributions immediately and significantly. Those nearing retirement can also take advantage of an additional catch-up provision with IRAs (additional $1,000 beyond the $5,500 annual limit for those age 50 and older). Ideally, retirement savings begins early and often, but there is a lifeline for those who can see their retirement light at the end of the tunnel.

Twenty years out. These clients have more time to save, but they must be focused now to avoid playing the catch-up game later. Once again, contributing to an IRA and workplace retirement plan is a solid prescription. If possible, deferring the maximum to their 401(k) is strongly advised. At a minimum, however, participants should contribute at least enough to earn the full company match that their employer offers.

Your clients may also consider establishing an emergency account to meet with unexpected financial hardships that may arise (e.g., job loss, home or car maintenance, or medical issues). A good rule of thumb is to have enough to cover three to six months of essential living expenses. After all, those who don’t have enough saved may be forced to tap into their 401(k) or other retirement savings, and that 401(k) leakage can be damaging.

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