Employees who know more save more
Financial wellness is important for individuals and their employers, in part because of the role it may play in retirement. Individuals benefit when they are financially healthy, because it makes them more prepared to retire on time and with enough money. Companies benefit, too, because along with the potential for better-controlled benefit- and other employment-related costs, on-time retirements make room for promotions, new hires, and fresh ideas.
One aspect of financial wellness is financial literacy. The former can be defined as a state wherein the individual has control of his or her ongoing finances, can absorb a financial shock when one arises, is on track toward meeting financial objectives, and maintains the financial ability to make choices in life.
Financial literacy is more basic. It involves understanding concepts underlying financial wellness—and may therefore be the starting point of an effective financial wellness program. After all, like the attainment of any goal, reaching a state of financial wellness is the final step in a series; understanding why the goal is important has to come first.
Recently, the link between financial wellness and financial literacy was explored, using a sampling of US adults. The findings showed that people with a greater understanding of financial concepts are more likely to save for retirement. The data was collected using a series of questions, resulting in a score the study calls a Personal Finance Index, or P-Fin.
Among those whose P-Fin score was between 76% and 100% correct, 88% were saving regularly for retirement. For people with a P-Fin score under 26% correct, just 37% were doing so.
The study found a strong link between financial literacy and indicators of financial wellness. For example, as the P-Fin scores rose with correctly answered questions, respondents were more likely to track their spending, to have non-retirement savings (in addition to dedicated retirement savings), and to be less financially fragile.
One interesting result from the study (which came from TIAA and the Global Financial Literacy Excellence Center at the George Washington University School of Business), was that a strong majority of respondents (62%) showed good understanding of borrowing. More than half also understood saving (58%), earning (53%), and consuming (52%).
However, fewer than half (48%) of the survey’s respondents answered correctly on questions about investing. Other trouble spots were insuring (46%) and comprehending risk (38%).
Survey results varied based on gender, income, age and other demographic factors. Men scored higher than women about their personal finances, and older, wealthier people scored higher than younger, less affluent individuals. Keeping these variances in mind could be helpful when addressing the financial education needs of your own workforce.
Read more results from The 2019 TIAA Institute-GFLEC Personal Finance Index: Wellness at https://tinyurl.com/TIAA-2019-Pfin.
Where they stand, where they are headed
Can you help employees save (or save more)?
How realistic are employees about the true state of their retirement savings? While many among the three primary generations that make up today’s workforce are feeling pretty good about the future, all three may be seeing things a little optimistically.
Even if their vision is a little rosy, there are things employers can do that may make a difference in retirement savings for Millennials, Generation Xers and Baby Boomers alike. Recently, Natixis Investment Managers checked in on about 1,000 US workers spread across the three generations to find out how they are feeling about their savings habits and their future financial prospects. These workers were also asked what incentives would help them start saving, or to save more.
Here is a quick summary, by generation:
Millennials, the eldest of whom are now 38 and the youngest 23, have a great start on saving for the future. 43% of them express cautious optimism about being comfortable in retirement, although they admit they will need to be careful with their money. On average, Millennials began saving at age 25, and have saved about $80,000 already. They estimate they will need a little over $980,000 to fund retirement, a figure the report says is a little low. And they should factor in their targeted retirement age of 61 to make sure their savings last long enough. Many among this group have already taken money out of their plan balances: 30% have taken a loan, and 26% took a withdrawal.
Generation X is more financially worried than their younger co-workers. This group now ranges from 39-54, and just 18% of them believe they will have saved enough money to fund the retirement they want. Almost one fourth (23%) of them believe they will never be able to retire. This group appreciates auto-escalation in their 401(k) plans, taking advantage of it at higher rates than their co-workers do. But their belief that they will need $988,000 to retire is likely too low, especially considering they have fewer years to increase their current average savings of a little over $166,000.
Baby Boomers have a more realistic retirement savings goal, at $1,018,488—but they have much less time to reach it from their current point of under $307,000. Currently 55 to 73 years old, their average contribution rate is 8.5%, and they are targeting, on average, a retirement age of 69. It will take about $142,000 in annual savings to reach their goal, on average.
Among the 1,000 people participating in the 2019 Defined Contribution Plan Participant Survey, 700 participated in the plan available to them. When these were asked why they aren’t saving more, daily expenses were cited by 65% as the major barrier, followed by general debt at 43%. One sobering response to the question was “I’d rather than spend money to enjoy life now,” cited by 25%.
Of the 300 respondents who are not participating in their available plan, about one third said their employer doesn’t offer a match or that the match isn’t enough. The match seems to be an important factor for those who are participating, too. Overall, 56% of respondents report that their employer’s matching contribution is the top reason they are saving in the plan.
Learn more about the actions employers can take that employees say would encourage them to join the plan or save more by viewing the full report at https://tinyurl.com/Natixis-2019-DC.