Aggressive Saving Is Simply Essential
Art by Linda Liu
Rob Reiskytl, a partner and actuarial retirement consultant at Aon, recently spoke with PLANADVISER about his firm’s new white paper “The Real Deal,” based on the Aon “2018 Retirement Income Adequacy Study.”
As Reiskytl pointed out, the topline findings of the paper are sobering, showing that only about one in three workers will have enough put away to retire comfortably at age 67—i.e., without giving up a large portion of their average-working-year income. Still, Reiskytl noted reasons for optimism, including the simple fact that employers have a tremendous amount of influence over the saving behavior of their workers.
According to Reiskytl and the work of Aon researchers, one basic strategy for assessing and discussing an individual’s retirement readiness in this context is to compare his net savings amount with a simple multiplier of annual pay.
The paper suggests that the multiple of final annual pay that the average employee will need to have saved for an “adequate retirement at age 67” is just over 11 times. In other words, an employee making $100,000 per year would need to have saved something like $1.1 million by age 67 to maintain his standard of living after leaving the workforce.
Even as the typical worker can save for more than four decades to prepare for retirement, reaching this multiple requires lifelong discipline. As the paper says, even assuming an individual starts diligently saving at 25 and never stops, the proportion of annual pay he must defer—plus the addition of any employer match—is 16% in order to reach the 11-times figure by 67. Today, before the employer match, most individuals tend to save between 4% and 7% of pay.
Other findings show that “only 19%” of full-career contributors are projected to accumulate more wealth than they will need in retirement, while 15% will “fall close enough, or within two-times pay of our recommended target.” According to the white paper, reaching a minimum of nine-times final pay saved will allow a retiree to find at least basic financial stability by adjusting his post-retirement income downward.
“Still, that leaves two out of three full-career contributing employees who are not expected to have saved enough to retire at 67,” Reiskytl said. “Even with adjustments in spending, these employees will likely need to increase their savings or delay their retirement.”
According to Reiskytl, one of the most direct moves an employer can make to promote better retirement plan outcomes is to either increase or “stretch the match,” so that employees need to contribute a greater percentage of annual pay to the plan to get the full match.
Of course, stretching the match has to be done carefully, Reiskytl said, because many employees further down on the pay scale are already stretched thin economically and may not be able to afford to save more to reach the full match amount.