Taking care of employees is crucial for attracting and retaining top-tier talent. A progressive company culture, competitive salaries, and traditional benefits will always be a strong foundation for a...
Retirement & Succession Plans
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2 min read
When you take care of your employees, they often return the favor by displaying loyalty and commitment to your business. A company-sponsored retirement plan shows employees you care about their future and provides a benefit that helps you compete for quality employees.
However, there are many complex variables that go into making a retirement plan successful, and analyzing all those factors can be difficult for both planning committees and plan participants to wrap their heads around.
Retirement Calculators and Data Assumptions
One set of tools widely used throughout the industry to help guide individuals through the process of investing wisely in their 401(k) is retirement calculators. These are usually financial tools that allow users to input certain personal data points, such as annual income and current portfolio allocation, to help them determine how to achieve their retirement goals.
Not all retirement calculators or retirement planning tools are created equal, however, and the differences between them can dramatically impact what your participants’ outcomes look like. One of the major differences between these tools is the assumptions they use to determine projections.
For example, let’s say you have an employee, Tom Jones. Tom wants to know if he’s on track to retire comfortably at 67 years old with 80% income replacement. Tom inputs the following information into two different online retirement calculators:
- Current Income: $100,0000 annually
- Starting balance of retirement plan: $10,000
- Asset allocation: 70% stocks
- Employer will match 50% of the employee’s first 6% of contributions
- Current age: 35
- Age of retirement: 67
- Income needed at retirement: 80% of current income
With all other information being equal, Tom should expect both calculators to yield the same results, right? In reality, Calculator A tells Tom he needs to save approximately $5,000 of his current income per year, while Calculator B suggests he’ll need to save around $8,000 per year.
Why the disparity? As an example, Calculator A assumes an average life expectancy of 86 years old, while Calculator B assumes Tom will live to 92—meaning he’ll need to stretch his retirement savings out over six more years.
This is just one assumption that may impact Tom’s retirement projections. Other assumptions might include:
- Rates of investment return
- Automatic contribution increases
- Built-in pay raises around career benchmarks
- Varying inflation rates
- Pension or other forms of income
- Investment types
- Annual savings increases
Conclusion
A retirement calculator is a helpful tool, but certainly not a fortune teller. It can help your employees build a savings plan, measure their progress, and forecast different retirement scenarios based on adjustments to the data they input.
At SWBC Retirement Plan Services, our goal is to ensure that the metrics used to determine participant outcomes for your organizations’ employees are thoroughly understood and reflect a comprehensive due diligence process.
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