Two-thirds of American workers surveyed by Matthew Greenwald & Associates in 1996 said they were confident they would have enough money for retirement.
Yet 36 percent of these same respondents had not saved any money for retirement, and only one-third had calculated how much money they would actually need. A second study revealed that 46 percent of all Americans have less than $10,000 saved for retirement, hardly a foundation from which retirement dreams are realized.
It’s easy to put off retirement planning, but when you understand the long term costs of waiting, it’s easy to see that the best time to start planning for a comfortable retirement is now. Three major trends are making this even more important.
Demographics
The U.S. population is aging and living longer, putting an increased strain on existing benefit programs. According to a 1993 Arthur D. Little survey, life expectancies were 71 years for men and 78 years for women. While living longer is desirable, it increases the chance that you will outlive your retirement savings.
Responsibility shifting
Responsibility is shifting away from employers and the government to the individual. At best, you may be able to rely on Social Security to supplement your retirement income. Many employers are moving from defined benefit pension plans to defined contribution plans, such as 401(k) plans, putting the responsibility of fund accumulation and portfolio management on employees.
Poor financial planning
People are not saving enough, and what is saved is invested in low-returning options. Studies show less than half of 401(k) assets are allocated to equities. Inflation (increases in the cost of living) has the power to erode the value of your money over time, even if it remains relatively low in the short term.
If the annual inflation rate remains fixed at 4 percent, the value of your money will be cut in half in just 18 years. Historically, the most beneficial strategy to combat this problem has been to shift more of the savings into equities.
As a rule, you will need between 70 and 80 percent of your preretirement income, adjusted for inflation, to live comfortably in retirement. To bridge the gap between what you will need and what you currently have, disciplined investing should be initiated right away. One of the best ways to save for retirement is to take advantage of tax-deferred retirement plans.
Retirement plans are effective strategic business planning tools. Plan contributions are tax deductible for businesses and tax deferred for participants. Many businesses choose not to institute retirement plans because of the perceived administrative burdens associated with them. That’s because many retirement plans must meet special requirements, including special nondiscrimination rules which involve annual testing, and must file a Form 5500 annually.
Unfortunately, according to recent figures from the U.S. Department of Labor, more than 50 percent of small businesses with fewer than 100 employees do not offer a retirement plan to their employees. However, business owners who wish to compete for good employees can no longer afford not to have some form of retirement plan.
A Savings Incentive Match Plan for Employees (SIMPLE) can be an easy way to make contributions to provide retirement income without the administrative burdens associated with other types of retirement plans. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their compensation. Employers make either a matching or nonelective contribution.
SIMPLE plans are easy to adopt, and can be set up using either individual IRA accounts for each participant or as a part of a 401(k) plan. Employers are eligible for a SIMPLE plan if:
1) The employer employs 100 or fewer employees who earned $5,000 or more in compensation during the preceding year; and
2) The employer does not maintain another qualified plan.
A SIMPLE plan is cost effective and easy to administer. Unlike many other retirement plans, it is not subject to annual anti-discrimination testing and a SIMPLE IRA is not required to file a Form 5500. The SIMPLE plan allows the employer to offer a retirement plan without the sole responsibility of funding it.
SIMPLE plans allow eligible employees to make a salary reduction contribution of up to $6,000 per year. Employers are generally required to match each employee’s salary reduction contribution on a dollar-for-dollar basis in an amount not more than 3 percent of the employee’s compensation.
In lieu of a matching contribution, the employer may elect to make a nonelective contribution of 2 percent of compensation on behalf of each eligible employee who receives at least $5,000 of compensation from the employer for the year.
If the employer chooses to make nonelective contributions, only $160,000 of employee compensation is taken into account in figuring the employer contribution limit.
The bottom line is that a SIMPLE plan is an attractive fringe benefit that you can add to your recruiting arsenal.
Arthur Weisman is an investment consultant with First Union Securities. He can be reached at (216) 574-7300.
