Retirement Preparedness: Adapting to the ‘New Normal’

By SHRM Online staff Sep 19, 2011

The overall state of U.S. employees’ retirement preparedness remains low despite a positive trend in employees improving their finances and putting heavier emphasis on retirement planning, according to a September 2011 special report, State of U.S. Employees' Financial Preparedness, by Financial Finesse, a provider of workplace financial education.

The report shows that:

Most employees have never run a retirement projection. Fifty-seven percent of employees at pre-retirement age, between 55 and 64, said they had not run a calculation to indicate whether they were on track to replace 80 percent of their annual pre-retirement income (or their goal) in retirement. This number grew with younger generations: 68 percent of employees age 45 to 54, 67 percent of employees age 30 to 44, and 73 percent of employees under 30 indicated they had not run a calculation and didn’t know if they were on track to retire.

Employees on track to meet retirement goals fare better. Employees who reported that they are on track to retire had an average financial wellness score of 7.2 out of 10. They had sound money management skills, such as having an emergency fund in place, paying credit card bills in full each month and a plan to pay off debt. But those who are not on track and those who don’t know whether they are scored far lower, with a 4.2 financial wellness score for those not on track and 4.7 for those who don’t know.

Basic money management skills are essential to retirement preparedness. There were significant correlations between retirement preparedness and having an emergency fund, managing debt effectively and paying credit card bills in full. While U.S. employees improved their money management skills after the recession, most still needed to make significant improvements to their saving and planning behavior to meet their retirement goals.

“Employees are not doing enough to ensure their retirement, considering the 'new normal' is a retirement supplemented by more of our own savings,” said Liz Davidson, CEO and founder of Financial Finesse. “The environment is changing faster than employees are. They need to further accelerate their savings to compensate for the fact that they can no longer depend as much on their employers and the government for retirement income.”

Increased Challenges

Employees planning for retirement face challenges past generations did not, making retirement a more difficult goal to reach, Davidson said. These challenges include:

Lower expected long-term market returns and lower interest rates on investments, dubbed the "new normal" by some economists.

Reduced home equity to draw on.

Higher health care costs and longer life spans.

The likelihood of decreased Social Security and other government benefits.

“The obstacles of a shaky economy and reduced benefits pose risks for employers as they attempt to communicate these changes to employees,” said John E. Nelson, co-author of the best-selling book What Color is Your Parachute? For Retirement (2010, Ten Speed Press). “Employees are facing unprecedented uncertainty about their next stage of life, and that hurts workplace engagement and productivity,” Nelson observed. “The solution is for employers to be more strategic with financial and retirement education.”

Davidson echoed this sentiment, noting a movement by employers toward broad-based financial planning rather than treating retirement as its own silo, with the understanding that in a tough economy employees are forced to better prioritize their financial goals and manage day-to-day expenses more tightly.

“Employees’ saving behavior is highly correlated to other aspects of their finances,” Davidson said. “When they have their debt under control, are saving for other long-term goals and pay their bills on time, then they set themselves up for good saving habits and it carries into their retirement planning.”​

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