Four risks 401k participants may not know they’re facing
Life involves risk. One of them is retirement, and whether the money we save to fund it will last. Do your employees understand their risk and the actions they can take now to manage it?
A recent survey found that retirement security may be threatened by these four risk factors: longevity, behavior, market conditions and inflation. The survey found a disconnect between each of these risks and the actions of participants. While that’s a concern, it’s also an opportunity to structure communications to clarify the connection.
Risk #1: Longevity
In 2020, life expectancy for the average American is roughly 79 years. However, many can expect to live into their 80s, 90s or longer. Social Security may provide a minimal income, leaving a gap that must be filled with personal savings. Are your employees confident that their 401(k) balance will last 20, 30 or even 40 years?
Risk #2: Behavior
Considering the risk of outliving one’s savings, it would be wise to begin making significant retirement contributions as soon as one enters the workforce. Then, leave the money in the plan and invest it appropriately. While intentions are good, most of us don’t follow this course of wisdom. Instead, we delay starting, contribute little and take a distribution when we change jobs. The long-term result of these behaviors can be seriously detrimental to our account balance and retirement security.
Risk #3: Market conditions
The market goes up and the market goes down. We can’t stop the fluctuations, but we can manage our reactions to them. Understanding that concept may encourage participants to stick to an appropriate long-term investing strategy, providing some protection against the storm. Instead of reacting emotionally to market fluctuations (see Risk #2!), they may feel better prepared to ride out the bumps.
Risk #4: Inflation
There are investors who are so nervous about the stock market that they believe their money is safer in a cash equivalent fund, like a money market. They don’t realize that their earnings may not be keeping up with inflation, thus rendering their money less valuable each day than it was the day before. Education can help them see that an extremely conservative investment may not be as safe as they believe it to be.
The 2020 Retirement Risk Readiness Study from Allianz Life Insurance Company of New York found that 65% of pre-retirees said they plan to work at least part-time during their retirement years. However, among those who are actually retired, just 7% are working. Fifty percent of retirees said they retired earlier than planned, mainly due to factors outside of their control, 34% of them suffered an unexpected job loss and 25% retired early for health reasons.
By helping employees understand the factors that impact retirement, you may contribute to their ability to reach retirement security.
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