Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
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 emphasizes the care you have for your employees and provides a benefit that makes you more competitive in your search for quality members to join your team.
However, many complex variables 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 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.
What Are Assumptions in Retirement Planning?
Assumptions play a significant role in any financial calculation and retirement planning is no exception. Retirement planning assumptions refer to the variables and projections that are used to forecast an employee’s financial future, both those that are seen or directly input by the participant and those that are unseen because they are built into the framework of the retirement calculator. A few common assumptions can include:
- Life expectancy: The life expectancy of employees is a critical factor in retirement planning. An individual expected to live to 72 will need to save a completely different amount than one expected to live to 90.
- Inflation: Inflation rates directly impact your employees’ retirement savings spending power.
- Investment return: The estimated return of an employee’s investment plays a large role in estimating their retirement savings growth and stability.
- How long one will work: The number of years an individual is assumed to continue their career will impact how many years their retirement fund is saving for.
How Assumptions Can Impact Your Employee’s Retirement Planning: An Example
Tom wants to know if he’s on track to retire comfortably at 67 years old with a goal of 80% income replacement. Tom inputs the following information into two different online retirement calculators:
- Current Income: $100,000 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? In this 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. There are a wide variety of assumptions that will have significant impact on an individual’s retirement projections.
The future is unpredictable. That makes a retirement calculator a helpful tool, but not a fortune teller. It can be useful in guiding your employees through building a savings plan, measuring their progress, and forecasting different retirement scenarios based on adjustments to the data they input. However, it is important to remember that it is no more than an estimate on an individual’s retirement projections.
Ways to Effectively Prepare Your Employees for a Dignified Retirement
Preparing your employees for a dignified retirement benefits you and the valued members of your team. It ensures your employees are satisfied, which keeps them loyal and encouraged to continue their great work at your company.
While retirement calculators and data assumptions can be helpful for estimating how much your employees need to save for a healthy retirement, your employees still need to take the steps to plan for their own retirement.
As a retirement plan sponsor, you can encourage and help prepare your employees for a happy retirement by:
- Educating them: Knowledge is power, and the more your employees know about financial literacy, the more inclined they will be to participate in the company’s retirement plan. Offer financial literacy courses, customize your communications to educate a targeted audience of employees who have not yet enrolled in your course, and spread the knowledge about the importance of retirement planning at any age.
- Offering them access to financial experts and advisors: Access to financial advising will help employees tackle the daunting task of financial planning, helping them tackle a retirement savings plan more efficiently.
- Offering flexibility in their retirement planning: There is no one-size-fits-all when it comes to retirement planning. Each and every one of your employees will have personalized goals, dreams, and lifestyles. Offer customizable and flexible retirement planning options that allow more employees to reap the benefits of your plan.
Want to Learn More About Preparing Your Employees for a Healthy Retirement?
At SWBC Retirement Plan Services, our goal is to ensure that your 401k committee is successful in helping those you sponsor reach happy, healthy retirements. If you want to learn more about how you can encourage employees to prepare for retirement, check out the video in our e-course series titled, “What If… Your Employees Aren’t Retirement Ready?”, where we discuss effective techniques to approaching retirement readiness for your plan.
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