After watching the relentless volatility of the markets recently, many individuals are thinking more about retirement—and whether or not they're prepared. That rise in awareness is actually a good thing, because many people aren't as financially prepared as they should be for a retirement that could conceivably last more than 20 to 30 years.
Of course, investors can't control the markets. But they can control one of the more critical factors in determining their retirement security—their savings rate.
Unfortunately, a majority of Americans don't know if they're saving enough for retirement. In fact, just 42 percent of individuals surveyed by the Employee Benefit Research Institute (EBRI) said they and/or their spouse have tried to calculate how much money they'll need to accumulate so they can live comfortably in retirement.[1] And those who have attempted a calculation tend to underestimate the amount of savings they'll need, according to EBRI.[2]
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So what prevents people from taking steps to improve their own retirement outlook? In a lot of cases, they just don't know how to get started. In fact, lack of confidence continues to be the No. 1 reason why pre-retirees don't create a written plan for retirement, according to The Principal Pre-Retiree Survey, Spring 2011.
Those workers who do seek the help of a financial professional report greater confidence and better savings behavior. Forty-two percent of workers[3] who use a financial professional say they are saving enough money in order to live comfortably in retirement, compared to 22 percent who do not use a financial professional.
That's why the role of financial professionals in retirement planning is more important than ever. You have a tremendous opportunity to help individuals gain the confidence they need to take control of their retirement savings.
Start with this simple calculation
A quick way to get the conversation started with clients is by doing a simple calculation called the savings-to-employment income ratio. Just divide the amount the individual has saved for retirement by his or her current income.
| TOTAL RETIREMENT SAVINGS EMPLOYMENT INCOME | = | SAVINGS-TO-EMPLOYMENT INCOME RATIO |
Once you have the ratio, compare it to the chart [below]. Individuals whose ratios are above the line for their age are likely on track for retirement. Those whose ratios are below the line should consider taking action.
[click image for larger view]
A white paper titled "When the Destination is Retirement: A Way to Help Keep Investors' Plans on Track" from The Principal can give you more insight on using this resource with clients. The white paper also highlights drivers of the ratio that are most within an individual's control, including the savings rate, their age at retirement and their target income replacement ratio, as well as the chart's assumptions.
Working with savers to adjust one or more of these drivers could make a big difference in their financial security during retirement. And it's a great way to build relationships with these individuals that could continue after they retire. That's especially important, since 60 percent of retirees are uneducated about or unaware of retirement income planning.[4]
Help them overcome their inertia
By and large, Americans know they need to be better prepared for retirement. Most just need help getting started. Using the savings-to-employment income ratio can help them feel empowered to control the things they can—and take the needed steps for a more secure retirement.
[1] Employee Benefit Research Institute's 2011 Retirement Confidence Survey (http://www.ebri.org/pdf/surveys/rcs/2011/EBRI_03-2011_No355_RCS-11.pdf)
[2] Employee Benefit Research Institute's 2011 Retirement Confidence Survey (http://www.ebri.org/pdf/surveys/rcs/2011/EBRI_03-2011_No355_RCS-11.pdf)
[3] The Principal Financial Well Being Index 3rd Quarter 2011
[4] The Principal Pre-Retiree Survey, Spring 2011
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