Home > Financial Planning, Smart Business Tips > Taking the Fear out of Retirement Planning

Taking the Fear out of Retirement Planning

RetirementI envision a future in which traditional Halloween decorations and haunting music will be replaced by stock market tickers and closing bells. For an individual nearing retirement, nothing is more bone chilling than reviewing their quarterly 401(k) statements. Although we’ve ended October 2011 in the black, the volatility of the market over the course of the month certainly hasn’t instilled any confidence in our employees ability to retire.

According to a recent Prudential white paper on defined contribution (DC) plan solutions, this poses challenges for employers as well:

  • Increased volatility in staffing needs: DC participants’ retirement decisions will be heavily impacted by fluctuations in the financial markets (a 1% increase in the S&P 500 index in any given year increases the probability that a pre-retiree will retire by 2.5%).  DC participants are more likely to delay retirement when financial markets decline, when employers are facing headwinds in their businesses and would therefore prefer that forecasted employee retirements take place.
  • Higher workforce costs: The relationship between the age of your workforce and cost is complex – wages paid to an older worker vs. a younger worker may play a factor, as well as healthcare costs.
  • Reduced workforce engagement: Morale may suffer in your organization if the lack of retirements prevent opportunities for staff members to advance in their careers.
Prudential recommends adding a Guaranteed Minimum Withdrawal Benefit (GMWB) to your sponsored plan. A GMWB allows a participant a guaranteed amount of income in retirement, regardless of how long they live or how the market performs. It may sound like an annuity, but unlike an annuity, allows the participant to retain full control of their assets, and pays remaining assets to a beneficiary designated by your employee. The guaranteed income feature may allow a participant to stay invested more aggressively than they would in a traditional plan, allowing them to benefit from market upswings without feeling the pain of market downswings.  These features, of course, don’t come free; generally, GMWBs tack on an extra fee above normal fund management expenses, but may be worthwhile for the peace of mind they provide.
From the case study included in the white paper, it appears a participant in a plan with a GMWB feature:
  • Has a higher probability of being able to retire on time
  • May be able to withdraw more during retirement
  • Will always have an income source in retirement
  • May or may not be able to leave a bequest – however, keep in mind that retirement savings should be designated for just that purpose. If it is important to your employees to leave something to heirs, whole life insurance may be a good solution.
The limits for 401(k) contributions are increasing for 2012 – for more info on retirement plan limits, as well as additional tips and tricks (and treats), check out the retirement planning section of our website.
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