"Attention, employers. This is Denise. She's just entering the working world, but she's already concerned about retirement. She knows that traditional defined benefit pensions covered 84.4% of workers in 1979 but only covered 27.7% as of 2015 – and the share probably hasn't been increasing.
She expects you to offer a 401(k) or similar defined contribution program, but how can she contribute to her plan and save for retirement given stagnant wages and her current debt burden?
You can help. For $2.64 per hour – less than the cost of your tall Starbucks Caffè Latte – you can set Denise up with suitable income that allows her to retire with a reasonable nest egg. Won't you help Denise and her new co-workers today?"
You may not see the above ad anytime soon, but perhaps you should.
Nir Kaissar, founder of the asset management firm Unison Advisors, concluded in a recent study that employers could restore retirement security by contributing $5,500 per year to each employee's retirement account – approximately $2.64 an hour given (40 hours times 52 weeks=) 2,080 hours of work per year.
Some companies that offer 401(k)s also contribute matching funds – but at the typical 3% match, you'd have to make over $90,000 annually to reach a $5,500 retirement contribution (including your 3% contribution required to get the match).
Even with the multiple assumptions required to reach the $2.64 per hour figure, Kaissar's point is well taken. By shifting retirement savings burdens to employees, employers have saved significant money over the last four decades. However, that savings has not been passed on to workers in the form of proportionately higher wages. Kaissar contends that businesses can pass a larger portion of their savings back to workers and avoid a societal retirement catastrophe.
Data from the Government Accounting Office backs up the retirement catastrophe concept. The personal savings rate has dropped from 14.2% of disposable income in 1975 to 6.8% in 2018. Almost half (48%) of households age 55 and over had no retirement savings as of 2016, with 29% of that group having no defined benefit plan as a backup. Of the 52% that had retirement savings, half had a defined benefit plan.
Those percentages will change rapidly as boomers with defined pensions retire and the majority of remaining workers is dependent on Social Security and clear contribution plans.
Don't expect employers to jump on the $2.64 plan as a fix. In simplistic terms, $5,500 per employee is an extra $55,000 off the bottom line for every ten workers employed.
Employers aren't likely to take Kaissar's advice – and even if they did, you should take responsibility for your own retirement. Start by setting (or reviewing) your retirement goals. How much money will you need at retirement, and do you have sufficient cash flow set up during your retirement years? Kaissar used a 4% annual draw rate, but you may need more or less depending on your plans.
Online retirement calculators are available to help you run through best and worst-case scenarios involving retirement funds, Social Security payouts, and retirement expenses.
Once you know the necessary total, work backward to set an annual budget to meet those goals. Set aside the proper amount each month, with extra for contingencies. Take full advantage of all retirement programs that your employer offers, especially when matching funds are available. An employer match is essentially free money.
Our advice to Denise and her fellow new workers – and to you – is to hope for the best in retirement, but plan for the worst.
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