An Advisor Action Plan for Encouraging Retirement Savings

The data on retirement savings tells a frightening story. According to the 2017 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), 6 in 10 American workers feel confident in their ability to retire comfortably, yet only 18 percent feel very confident. What’s even more concerning? Just 41 percent of American workers report they or their spouses have attempted to calculate how much money they need to live a comfortable retirement.

There’s just no getting around it: saving is the single most critical step that individuals can take to prepare for retirement. But as you’ve no doubt witnessed with your own clients, most Americans need some guidance. To help you be part of the solution, here you'll find an advisor action plan for encouraging retirement savings. Let’s start by taking a look at what’s working (and what’s not) for many Americans when it comes to funding their retirement.

The first step in encouraging retirement savings is to take stock of what is and is not working in terms of savings options.

Individual savings. Did you know that nearly 7 in 10 Americans have less than $1,000 in their savings account? And an astounding 46 percent admit to being ill prepared to handle a $400 emergency expense. So, why aren’t they saving? The answer is the power of spending.

Personal consumption accounts for 70 percent of the nation’s gross domestic product. Spending is more emotionally satisfying than putting aside money for a future need. Remind your clients that all it would take to save enough to cover the aforementioned $400 emergency would be to save $20 per week for five months.

Employer-sponsored plans. Now for some good news. When workplace retirement plans are factored into the savings equation, we find encouraging signs of progress. Up to 73 percent of employed workers are offered these plans, and 83 percent say they contribute money to them. Further, workers who are closer to retirement have achieved significant savings success using 401(k) plans—the average account balance among participants in their 60s who’ve been working for more than 30 years is nearly $275,000.

Social security and Medicare. The 2017 Office of the Chief Actuary Trustees Report indicates that social security will be exhausted by 2034. Only 37 percent of workers are very or somewhat confident that social security will continue to provide benefits equal to the value of what’s available today, but most still view social security as a source of income in retirement. As for Medicare, only 38 percent of Americans have confidence that the Medicare system will continue to provide benefits on par with what today’s retirees receive. Reliance on these programs is a dangerous game—and your clients need to be educated on the odds.

Ensuring that you are synchronized with your clients on their retirement vision is essential. Ask them to e-mail you a few images of what they envision as a satisfying retirement. Some may want to settle into a serene lakeside cottage, for example. Others might like to hit the open road in an RV. Whatever their dream, once you are in tune, you can begin setting expectations and constructing a plan to meet their retirement goals.

Here, you’ll want to keep in mind that there is a misalignment of when workers expect to retire and when they actually retire. Many workers delay retirement because: 

• They can’t afford it.
• They lack faith in the social security system.
• They are worried about rising health care costs.

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.

Millennials. Time is a major ally for millennial investors, and it’s essential to help them build the framework for healthy financial habits in their formative earning years. This doesn’t mean it’ll be easy to convince them.

Most millennials are saddled with student loan debt. Helping young retirement savers understand the impact of their debt (student loans, credit cards, etc.), and how to manage it, is crucial to helping them make decisions that will have a lasting impression as they progress in their financial journey. Recognizing the part that debt plays can also be critical to helping young savers develop a budget and set financial priorities and themes.

As with a retirement saver of any age, contributing to their 401(k) plan and an IRA should be considered. Deferring enough to capture the company match is desirable, yet not as critical for younger investors. In the early years of saving, the most prominent theme is to start early and save often.

Whether your clients are just beginning their retirement journey, strolling along the path, or nearing the finish line, one thing is certain: they need a strong, unwavering voice to guide them to the retirement destination they have worked so hard to achieve.

What other steps do you take to encourage your clients to save for retirement? What strategies have worked with your millennial clients? Please share your thoughts with us below!