The concept of a ‘retirement age’ is tragic in a sense, because it causes so many people to conceive of retirement as something that can be achieved passively like a milestone similar to a birthday, with little input required to get there beyond waiting out the passage of time.
‘Retirement age’ as a term also somewhat implies that the age of retirement is expected to be the same for everyone, while age is one of the least relevant of several factors that will ultimately determine if and when any given person is capable of retiring from the workforce and maintaining their expected standard of living.
Too often these misconceptions can lead employees to put off or minimize retirement savings in the near term, without realizing the impact those delays and under investments will have in the long run, which can have severely negative consequences for employees later in their careers as they try to make up for lost ground.
Last week, we discussed 401ks largely from an employer perspective and provided some benchmarking data that can help organizations better understand how their retirement benefit offerings compare to the market, here we will take a closer look at retirement savings from the perspective of individual workers, account holders, and would-be retirees.
For employers who want to optimize the value of the benefits they offer, it is necessary but not sufficient that employees internalize the value of those benefits in line with market expectations, but employees must also believe on a personal level that their individual retirement position is secure and on track relative to both their peers and their own subjective situational goals.
It’s natural for employees to have many varied questions about their retirement options and considerations, of course, but almost no matter what kind of retirement a given employee may be envisioning, the best answer to the question of how to attain that vision involves a recommendation to start saving more money sooner.
In order to maximize the benefits of earnings compounding over a longer period, the best time to start saving for retirement was any time between day one on the job and yesterday, but the second best time to start saving is now.
And while there are a number of factors of varying complexity that can affect both retirement goals and the steps necessary to achieve them (e.g. geography, expenses, age, etc.), this recent piece from CNN highlights a basic retirement savings outline crafted by Fidelity Investments that is a good starting point to help employees to get their bearings at the very least:
Of course, while the simplicity of this framework is certainly a strength in terms of its memorability and general applicability, that same simplicity is also a weakness when it comes to more specific, precise, or actionable advice.
For example, although relative standard of living considerations are largely accounted for by using annual salary as a base unit (assuming one’s annual salary affords a comparable standard of living to what they hope to maintain in retirement), and retirement age is fixed at 67 in line with when full social security benefit payouts currently become available, the verbs ‘to have saved’ are doing a lot of heavy lifting without providing any detail about monthly savings breakdowns or how interest rates, raises, and contribution timing fit into the equation.
Perhaps the greater weakness in Fidelity’s simplified retirement savings framework, however, is less about the lack of detail or actionability and more about the aspirational nature of the framework, which can be disconnected from the reality of what a given employee can potentially reproduce in light of their age, location, job, pay rate, and other circumstances.
In order to learn more about the reality on the ground for how employees are engaging with their 401k savings, real world data is likely going to be a better source of information than general guidelines.
As the following graphics illustrates, two variables that have a significant impact on both contribution rates and total retirement account savings value are the account holder’s age and their tenure with their current company.
Clearly, older workers have had more time both to contribute to their 401k accounts and for those contributions to compound and grow, with workers over 65 years of age having a median of a little over 70 thousand dollars in those accounts while workers at the age of about 45 years old only had a median of about 38 thousand.
Note across the age ranges, the average savings figures are often about 3 times larger than the median savings figures, indicating that the majority of value contained within 401k accounts is skewed toward the accounts with above average levels of savings.
While length of time on the job is certainly correlated to age and both increase alongside 401k savings over time, what may be most noteworthy about the age and tenure comparison is just how much more impactful tenure can be in terms of overall savings.
As the following graphic indicates, staying with a company for 10 plus years can reap major rewards in terms of retirement savings - of course how much of that outcome is dependent on rising through the ranks over an extended tenure isn’t clear from the available data.
Still, it is hard not to look at these graphs and see some indication of how valuable internal talent development and two-way loyalty can be for both employers and employees both during the tenure of the work and after leaving the workforce.
It is also worth pointing out that average 401k savings relative to tenure is about twice as large as median 401k savings relative to tenure, which is a less sizable wealth gap than average 401k savings relative to age, which was about 3 times larger than median 401k savings relative to age.
These figures seem to show that longer tenure is more positively correlated with earning above average pay than getting older is positively correlated with earning above average pay.
Combined employer plus employee contribution increases with age, as one would expect, but it is not as significant as one would expect - or hope.
The average combined employer and employee contribution rate is approximately 5%. Contributions begin at around 4% for individuals aged 20-29 and exhibit a gradual increase, reaching a peak of about 5.2% among the 50-59 and 60-69 age brackets.
A deeper analysis suggests that the primary driver behind this progressive increase is enhanced job tenure. As employees remain longer with their employers, they not only become more inclined to save for retirement but also benefit from mechanisms like auto-escalation features within 401(k) plans. This trend underscores the significant role that sustained employment plays in bolstering retirement savings efforts.
As the Baby Boomer generation continues to depart from the workforce and begins to test the capacity of our infrastructure and our country’s ability to care for its aging citizenry, the stark truths that successful retirement can almost only ever be attained through diligent proactive effort and is in no way guaranteed will become increasingly obvious for employees at all stages in their careers.
Forward-looking companies should do more now to ensure their employees are well-positioned to manage the challenges they will meet when their careers have come to an end, which in turn will build loyalty, improve the expected outcomes, and enable employees to better focus on the challenges they encounter in their careers along the way to the mutual benefit of everyone involved.
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