Helping Employees With Retirement Planning During Market Volatility

During uncertain times, employees may stop contributing to retirement plans or make investment mistakes. Here’s how to help with employee retirement planning.

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Helping Employees With Retirement Planning in a Volatile Market

More than a third of United States workers don’t have a retirement account. Of those that do, more than half have taken an early withdrawal. On top of that, 2/3 of savers say they believe they are on target for a comfortable retirement — but experts disagree.

With few companies providing pensions anymore, many employees are counting on Social Security in retirement. Unfortunately, that alone may not be enough to support the lifestyle they want.

When the markets are volatile, it can make it even more difficult to put money away for savings, especially during times of inflation. Dollars don’t go as far as they used to, so saving becomes even harder. It can be tempting for your employees to stop saving completely or pull money out of their retirement to avoid additional losses.

Any of these steps would be mistakes. As an employer, your employees’ long-term financial security is important. It’s important to support sound employee retirement planning in your organization.

Helping employees plan for retirement during uncertain times

Employers shouldn’t be in a position of offering investment advice. That’s a recipe for trouble, especially if things don’t work out. However, you can encourage your employees to properly plan for retirement.

One of the best things you can do is offer training on employee retirement planning from experts. If you have a 401(k) or another retirement plan in place, there’s a pretty good chance your provider will offer free investment training courses for your employees. They will also have plenty of resource material available to aid in how to prepare employees for retirement.

If you have a 401(k) or another retirement plan in place, there’s a pretty good chance your provider will offer free investment training courses for your employees. They will also have plenty of resource material available to aid in how to prepare employees for retirement.

Here are some of the things they’re likely to discuss.

The importance of long-term savings

There are several big advantages of investing in an employer retirement account. Besides the money that will be there when workers retire, there’s also the immediate benefit of reducing their tax liability until they withdraw their money.

Here’s an example. Let’s say an employee makes $50,000 a year and they’re in the 22% tax bracket. Before taxes, they would take home $962 a week. If they invested $100 a week in a tax-deferred retirement account, their take-home would only drop by $78. For a $78 investment, their employee retirement account grows by $100.

At the same time, employees can take advantage of compound interest over time, and even a small investment can grow substantially. If employees save just $10 a week for 30 years in a retirement account with an estimated return of 7% compounded monthly, they would have a nest egg of $52,861.

How markets work

in the decade following the 2008 recession, Fidelity Investments reports that the average retirement plan gained 466%. Your workers need to understand these patterns so they don’t make rash decisions in a downturn.

When the market is volatile, it can be a scary time for investors. As employees watch their retirement savings lose money, it can be tempting to pull back. According to a report by Hooker & Holcomb, a fter the market downturn in 2008, more than a quarter of people stopped contributing to their retirement savings plans altogether.

For long-term savings like retirement accounts, market downturns are typically followed by growth periods. For example, in the decade following the 2008 recession, Fidelity Investments reports that the average retirement plan gained 466%. Your workers need to understand these patterns so they don’t make rash decisions in a downturn.

The huge benefit of employer matches

If your employee retirement benefits include a contribution match, your employees need to take full advantage of it. For your employees, it’s free money. The average employer match is around 4.5% with most programs offering between 3% and 6%.

Most employers offering matches will contribute up to 50% of an employee’s contributions up to a maximum amount. So, if an employee contributes 9% of their wages, the employer in this case would contribute an additional 4.5%. That’s a 50% increase on the amount saved automatically. Even if the market value of an employee’s savings drops by 10%, they’re still coming out way ahead.

And, when the market rebounds over time, the growth can be even bigger.

Investment options

Many employees may only look at their accounts once a year and may not even be aware that there are different options available.

Within most plans, employees have options for how to invest their retirement savings. Different options will have different risk profiles, fees, and return rates. Depending on how comfortable employees are with risk, they can choose more aggressive or more conservative options.

As a general rule, investors should be aggressive early in their careers to generate growth. They can then turn more conservative as they approach retirement years to protect their assets.

Most retirement plans today also offer retirement target-date portfolios. These automatically adjust depending on how close an employee is to retirement age.

Diversification

Reviewing investment options should also include information about diversification. When employees put all their retirement savings into one type of investment, they’re more at risk. Investing in different types of assets can help provide a hedge against market downturns.

Most investment advisors recommend a diversified portfolio to weather volatile markets.

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Early withdrawals

Some employees may be tempted to cash out the retirement plan and put it into a savings account to avoid future losses. They need to understand the consequences before they do this. Not only are they giving up future savings, but they’re also going to be hit with a significant penalty for doing so.

While the Coronavirus Aid, Relief, and Economy Security (CARES) Act waived the penalty for those qualified for COVID-19 relief, any other withdrawals automatically include a 10% penalty. So, early withdrawals will cause a worker to lose 10% right off the top. Plus, they’ll be liable for taxes on any money they withdrew.

Catch-up contributions

Employees who are age 50 or older can also take advantage of catch-up contributions to put away more of their income. For 2022, workers may be eligible to contribute an additional $1,000 to an IRA and an extra $6,500 per year to a qualified 401(k), 403(b), and other plans.

Savers will need to decide for themselves whether this is a smart strategy when there is market volatility. Adding additional contributions to a retirement plan can reduce the current tax burden, though.

Helping employees save

By making retirement planning part of your onboarding and educational programs, you can reinforce your benefits program and help employees save. It demonstrates you care about their future and will work with them to make sure they save enough to live the life they want in retirement.

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