Market Ups & Downs: What Do They Mean For Your Employees and Their Retirement?

If you've turned on the news or opened a newspaper in the last several months, you've probably noticed that the Stock Market has been making headlines. Expectedly, the roller coaster ride that the Market has been on recently has caused more than a few sleepless nights among avid investors and market spectators across the country. What you may not realize is that these drastic fluctuations in the Market are making a significant impact on both employees' plans for a comfortable retirement and employers' bottom-lines.

Market volatility can inconspicuously jeopardize retirement plans through its effects on investment returns. Many employees have never contemplated market volatility as being relevant to their retirement plans. Everyday conversations of market fluctuations commonly focus on gains and losses in stocks and bonds and the ever sought-after "get rich quick" pick, yet somehow, many employees do not associate these changes with their retirement investments. Perhaps it's because the common mindset is that contributions to company retirement plans automatically guarantee sufficient retirement funds. This mindset yields a false sense of security.

Many employees simply are unaware that market fluctuations can significantly impact their savings. By offering financial education to your employees, you can provide your employees the essential skills to calculate current savings requirements in order to fulfill the goals and financial needs that accompany retirement. Financial education can equip them with the knowledge to recognize the effects of a wavering market as it applies to their retirement funds, as well as the insight to systematically and periodically review their investments to determine if a response to these fluctuations is necessary. By having the knowledge to diversify their portfolio based on individual risk tolerance and the understanding to determine when it is time to rebalance, your employees can be confident and secure with their investments. Both responding correctly and knowing when to respond to market fluctuations can enable your personnel to maintain their retirement goals. Providing financial education allows you, the employer, to empower your personnel to make more valuable financial decisions thereby enabling them to retire on time, if not early, due to an increase in financial position.

From the perspective of your company's bottom line, it makes sense for employers to embrace the concept of helping employees ascertain how and why they should save for retirement. Although the value of retaining older, seasoned employees cannot be disputed, they are typically the most expensive to employ because of accompanying factors such as occupying the highest end of the pay scale, requiring the most expensive health insurance premiums and other benefits costs, having the most vacation days, and being at greatest risk for an accident. Based on certain assumptions, some speculate each employee who is unable to retire on schedule can cost your company over $50,000 per year. According to The 1999 Retirement Confidence Survey sponsored by the Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC), and Matthew Greenwald & Associates, Inc. (MGA), only half of all workers have tried to determine how much they will need to have saved by the time they retire! Only 36% have thought about insurance coverage for long-term care, and just 16% have saved $100,000 or more for retirement. In contrast, of those workers who have received financial education from their employer, 40% said it either caused them to begin or resume saving for retirement, while 81% said they changed the amount they were contributing to or the allocation in a retirement plan. Additionally, those who received financial education were more likely to have performed a retirement-needs savings calculation. You can infer from the study noted above that the vast majority of employees are not saving adequately for retirement. Perhaps that's because many employees perceive they cannot afford to participate and consequently never focus past current debt. For those employees, learning how to structure debt and begin a savings plan now can afford them the opportunity to enjoy their retirement years with few financial worries. Furthermore, you can also infer that those with an existing retirement savings plan who have become more financially astute due to financial education have improved their retirement scenario. Undoubtedly, all employees can derive some benefit from financial education, and it is evident from these statistics that an overwhelming number of employees need financial education to make more informed financial decisions. The truth of the matter is that unless financial education is included as an additional benefit, employers will embark upon an era filled with older personnel unable to retire. Therefore, it is mutually beneficial to assist personnel in obtaining their retirement goals

Now, think about your workforce. How do these statistics compare to your employees? Do they understand the importance of diversification in their retirement portfolio? Do they know how fluctuations in the market can affect the way they should approach their strategy for allocating their assets? Are they saving adequately to fund retirement? The following example demonstrates the importance of having the right balance of risk and time horizon in your portfolio and also shows how being an informed investor can better qualify you to make the right investment decisions to ensure your preparedness for retirement.

For example, let's consider this scenario: John Wilson is 35 years old and plans to retire in 30 years at age 65. He has projected that he will need a retirement income of $2,600 a month in today's dollars to ensure a comfortable retirement. However, John doesn't realize that this $2,600 per month in today's dollars is actually equivalent to $8,424 per month in 30 years when taking into account an average inflation rate of 4% per year for the next 30 years. John feels certain that to accomplish this goal, he can contribute $360 a month to his retirement plan that is currently earning a 6% rate of return. Additionally, he has already accumulated $30,000 in his 401(k) account. If John continues saving and earning at this current rate, his account will have grown to $534,000 in 30 years. If John expects to live for 25 years in retirement, will this amount be enough? The answer, much to John's surprise, is unfortunately, no. John will have a monthly retirement income of only $2,243 in future dollars-far short of the $8,424 he will need to live comfortably. What can he do?

John has several options (besides panic). He can increase his contributions to the 401(k) account, devise ways to live on less money in retirement, defer retirement for three years, or even seek other employment once retired. However, it appears that John has been moderately conservative in his investments, presumably to eliminate the risk of losing his principal investment. Perhaps if John can tolerate more investment risk, he may still be able to attain his goal. Therefore, John's most desirable option lies within his 401(k).

John may opt to reallocate his assets by positioning more of his money into equities where the risk may be greater, but the rate of return may be much higher. Because of his 30-year time horizon, John can afford to assume greater risk provided it's within his range of comfort. By reallocating his assets, John may be able to earn a 10% rate of return on his investments. After 30 years of earning at this higher rate, John's assets will have grown to $1,337,100! This will provide John a monthly income of $2,653 in today's dollars or $8,557 in tomorrow's dollars, and therefore, enable John to meet his retirement goals and retire on time!

In this example, John was able to attain his retirement goals because, upon becoming an informed investor, he was able to review his portfolio and determine that his current savings and investment strategies were incapable of generating the income necessary to sustain him comfortably during retirement. Not only was John able to recognize the necessity to revise either his investment strategy or his plans for retirement, but he was also able to restructure his portfolio according to his risk profile and time horizon.

Do your employees know how to meet their retirement goals? Do they have the financial know-how to identify when their investments are not accomplishing their desired goals? In today's volatile market, it is more crucial than ever that your employees have a grasp on their investment and retirement goals and the best arrangement of risk and time horizon to bring them to fruition. It is essential that employers provide their employees with the tools to enable them to meet their retirement goals and retire on schedule. Comprehensive, interactive financial education can provide your employees with the skills and knowledge they need to properly and effectively manage their retirement accounts.

In today's economy, it is impossible to predict what the market will do next. You can, however, be certain that you and your employees are prepared with the knowledge and skills necessary to respond effectively to the changes that frequent the market, thereby ensuring that you and your employees are on track for a secure retirement.

William R. Pomeroy, CFP
President
The EDSA Group, Inc.

www.theedsagroup.com
info@theedsagroup.com

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