Retirement/Financial Wellness Adages That May Not Be Helpful
A recent Forbes article indicated that the new retirement income annuity projections mandated by the SECURE Act, which are intended to encourage retirement savings, might have the opposite effect. For example, if a participant realizes that their $125,000 retirement account balance can only purchase an annuity benefit of, say, $625 per month, it is quite possible that rather than using this knowledge to save more, the participant may react by saying “What’s the point of saving for retirement at all, if so much money generates so little in retirement income?”
This got me to thinking that there are other phrases commonly used in retirement plan and/or financial wellness communications that, while they may be true, might actually scare people away from saving. Here are a few examples:
- You need to save at least 10% for a secure retirement — While this may be true for many employees, particularly older ones, it sets such a high bar that it can serve as a barrier for some. If they can’t (or believe they can’t) afford to save 10%, they save nothing at all, out of frustration. What should the message be instead? Save what you can, as early as you can, and increase that amount each time you receive a raise. Oh, and work on your finances so that you can afford to save more.
- You should have six months of emergency savings — Again, while this is likely a true statement for most (in fact, it might even be a longer time period for some), it is not a strong motivator. Six months of emergency savings is a lot of money for most folks, creating a savings goal that many may dismiss. And, even worse, some people might forgo saving for retirement, in their futile quest to fully fund their emergency savings accounts. A better message might be that saving for retirement and emergency savings are equally important, so save what you can to both and don’t become fixated on having emergency savings to cover a particular time frame.
- Debt is a destroyer of wealth and should be eliminated — Recognizing that some types of debt, such as credit card debt, are worse than others, like mortgage debt, the more debt a person has, the more someone else is making money off of them. However, emphasizing this can be counterproductive. Having zero debt is unattainable for many people and debt is also not an easy thing to tackle without wholesale changes to spending patterns. For example, there are many well-intentioned people who buy into the narrative that debt is to be eliminated, and thus, borrow or withdraw from their retirement plan to eliminate it. A few short years later, they are back in debt and their retirement account is smaller, because they did not address the underlying financial wellness issues that led to the debt in the first place! Thus, I feel that the alternative message should be yes, while debt is not ideal, do not allow yourself to be a slave to it at the expense of saving for retirement and other purposes. Try to address what is causing you to go into debt, while still meeting your retirement and other savings goals. And do not borrow or withdraw from your retirement plan to pay off debt!
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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