With the economy in flux and 78% of Americans living paycheck to paycheck, unfortunately future planning and savings can be first to take a backseat. This is especially true among younger employees as they feel they have years ahead to build their retirement savings.
As an advisor to these employers, you can help them build a case to convince employees, especially first-time workers, of the importance of contributing right away and ramping up their contributions as their careers progress.
A stable financial future relies on healthy habits. If we can help younger generations of workers establish positive financial behaviors early on, like contributing to their 401k plans, they’re more likely to remain consistent with this behavior even if times get tough. My words to live by: “It’s not what you make, it’s what you save.”
One of the first things you can help employers explain to their employees is what even a 2% contribution looks like over time. Based on our 2019 employee assessment, 56.6% of the Millennial audience contribute less than 2% of their income to a retirement account.
There are numerous online tools available to help employees understand how their contributions now will grow over time. Giving employees the ability to see what their 401k will be worth in 20, 30, 40 years can be hugely motivating and go a long way toward encouraging 401k participation.
For an employee making $30,000, contributing 2% and never increasing that contribution, they may think it’s hardly worth it. A simple financial calculator can help them visualize a retirement savings of $200K+ in 30 years. Increasing that contribution percentage to 3% will put them above $300K in 30 years. There are also tools available for employees to quickly how increasing their contribution will impact their retirement savings.
For a first-time worker, seeing those numbers can mean big things. It’s motivating and encouraging to see your savings build and your investment paying off. If you can help employers encourage their employees to start those saving habits early on, they’ll be able to share resources like online calculators enabling employees to monitor progress.
Another way to frame it for employers? Ask employees how much they feel they’ll need to retire comfortably. Then show them how to calculate where their 401k is projected to land by their desired age of retirement.
About two-thirds (65.4%) of Millennial employees reported that they have less than $10,000 combined in total savings and retirement. What they’re unlikely to realize is how much they’ll need to increase their contribution in the coming years to build that 401k balance.
Based on a 2019 Schwab Retirement Plan survey, the average 401k participant thinks they’ll need $1.7 million to retire. This figure alone could be enough to encourage 401k participation and get employees to rethink their contribution, especially if they desire to maintain a certain standard of living.
You can also provide employers with resources to help employees understand the value of tax-deferred accounts. Many first-time workers have yet to test the waters of investing, so they aren’t aware of the various long-term and short-term savings vehicles available to them. Provide resources to employers that explain how tax-deferred investment accounts, like a 401k, can generate substantially greater returns than traditional investments in the after-tax market.
The most difficult thing for younger workers to understand is how their investment now will build over time. Small investments may seem immaterial, but this type of data and statistics can help prove out the value of starting early.
David Kilby is a personal finance expert and president of FinFit, a national financial wellness brand based in Virginia Beach, Virginia.
David Kilby is a personal finance expert and president of FinFit, a national financial wellness brand based in Virginia Beach, Virginia.
