Archive

Archive for the ‘Retirement planning’ Category

Baby Boomers and Millennials: Two generations prepare for retirement

May 28th, 2015 No comments

Murray-SarahMuch has been said and written about the differences between generations. Indeed, two separate studies recently highlighted retirement planning trends among two different cohorts. Baby Boomers were the subject of a December 2014 report issued by the nonprofit Transamerica Center for Retirement Studies (TCRS), “Baby Boomers Are Revolutionizing Retirement: Are They and Their Employers Ready?” and a younger generation got the spotlight in the Principal Financial Group’s 2015 Millennial Research Study.

The people of the Baby Boom generation have been trailblazers in many ways and it seems their retirement plans are no different. According to the TCRS report, Baby Boomers are changing the traditional idea of what the golden years should look like, out of necessity if for no other reason. A somewhat grim statistic from the report is that 41% of Baby Boomers expect their standard of living to decrease when they retire. With longer life expectancies, the rising cost of healthcare, and a lack of adequate savings, it’s no surprise that many people in this generation expect to work beyond the traditional retirement age of 65. Some expect to never stop working completely. Many call working in retirement the “fourth leg” of the traditional “three-legged” stool.

TCRS’s research found that there is a strong desire among Baby Boomers for phased retirement options, but in reality less than half of employers have practices in place—such as the ability to move to a part-time position while drawing retirement benefits—that allow employees to transition into retirement slowly. TCRS’s report discusses ways Baby Boomers can positively change their retirement outlook, such as keeping job skills up to date and seeking advice from a financial advisor. In addition, the report mentions ways employers can help employees transition into retirement, such as providing phased retirement options and educating employees on Social Security and Medicare.

What about the Millennials? While the Principal Financial Group’s report summarized results regarding all aspects of Millennials’ finances, the research included trends in retirement savings. Here are some encouraging statistics in Principal’s report:

• 82% of Millennials feel it is important to save for retirement
• 63% of them started saving for retirement at or before age 25
• 59% of them plan to maximize the amount of pretax contributions allowed in their accounts

Principal’s study also indicates that most Millennials believe they should be contributing more of their pretax pay to their employer-sponsored retirement plans than they currently are, but at least a majority of them have made the crucial step to start saving, no matter how small the contribution.

One notable difference in the generations is technology preferences and usage. Millennials are used to communication through employer websites, email, texting, and even social media sites such as Facebook. While these concepts certainly aren’t foreign to older generations, Millennials are more likely to expect their employers to communicate with them electronically rather than through traditional methods such as regular mail.

Another difference between the two groups is whether or not they expect to be able to rely on Social Security. While many Baby Boomers have already started receiving Social Security, the Principal report states that only 22% of Millennials include Social Security in their retirement planning, presumably because the system’s purported problems have been well covered in the media.

But let’s not pretend that different generations have nothing in common. It’s safe to say that the majority of American workers, regardless of age, know that retirement planning is important, but find it intimidating at times and can benefit from employer assistance. While Principal’s study states that 60% of Millennials expect to be better off financially than their parents, younger people may still find themselves in need of options such as phased retirement and can reap the benefits of an older generation paving the way for change.

As is always the case, the optimal retirement scenario occurs when both the employee and employer contribute to the success of the employee’s retirement goals. Employers can benefit from creating a workplace that supports workers of all ages. Recognizing the differences between generations, developing retirement planning resources that help employees at every stage of their lives, having a broad employee communication and education approach, and supporting phased retirement options can help achieve this goal.

Plan sponsors: How to keep employees on track for retirement readiness

May 12th, 2015 No comments

Guanella-JayPeople get excited about technology. There are hundreds of websites chronicling the next big thing in technology, presenting information about how a device will save you time and money while providing entertainment. Getting people excited about or even acknowledging a retirement plan is much more complex. Over the years, there have been several new features created to help participants by increasing the flexibility of how they fund their retirements. Participant inertia is a large problem and directly relates to the usage of these new features.

As retirement plan professionals we believe having a solid retirement strategy is a no-brainer. For us, it’s a partnership with the plan sponsor that leads to great results by getting them involved and sharing responsibility of communicating and educating the participants. Human resource professionals have direct contact with employees and a great understanding of the best communication mediums and incentives that drive employees to take action.

There are several tools available for participants to project their retirement income. One of them, PlanAhead for Retirement®, enables participants to input additional income sources and variables to project their replacement incomes. Through the PlanAhead for Retirement tool, there is also a retirement readiness report that provides clients a view of the expected retirement outcomes of their participants on a plan level. The retirement readiness report displays where participants fall in relation to their projected replacement income at retirement. The report allows the client to change several variables such as the target of replacement income, return on investment, and changes to employer contributions. This is further broken out by age, service, and participant contribution rate. This interactive report helps the client make the leap from using current data such as participation rate and average deferral rate to projecting the results in the future.

PlanAhead_exhibit_1

At a plan sponsor level, using industry-related statistics on participation rate and average contribution rates we can show plan sponsors how they compare to their peers. Any deficiencies in the peer comparison are consulting opportunities. Using their participant demographic data, scenarios can be created to determine how changes to plan design (i.e., adding or increasing employer match) or targeting communication to specific participants encouraging them to take advantage of the benefit provided will improve results.

At an employee level, the medium of communication and the timing of the call to action are also paramount. Coordinating the retirement plan education and enrollment at the same time as other benefit enrollment periods has advantages as the employee is already completing paperwork. Showing an employee general information on plan demographics can also lead to an increase in participation and contribution rates via competition. Inertia is present in all retirement plans. What better way to promote change than to make it a competition, albeit an internal one.

Getting a plan sponsor to act on a retirement plan is just as important as getting the employees to act. As retirement plan professionals, we know that developing a partnership with sponsors can help lead to great results, keeping employees on track and taking steps to more successful retirements—using that flashy new technology that makes it easier for everyone.

Milliman awarded “Save 10″ recognition for helping workers save for future

May 8th, 2015 No comments

With more than half of Americans not saving enough for retirement, the Financial Services Roundtable (FSR), Washington’s leading financial trade association, is recognizing Milliman with a “Save 10” award for its tremendous efforts to help their employees prepare for a secure retirement by enabling them to save 10% of their income.

G-Erickson_Milliman-Save-10-Award

Milliman’s Gerald Erickson receives Save 10 Award from FSR CEO Tim Pawlenty on behalf of the firm.

The newly launched “Save 10” campaign is a business-to-business, peer-to-peer effort to encourage responsible employers to help their employees save for a secure financial future by initiating programs to encourage employees to put aside 10% or more of their income each year.

Milliman’s plan includes a 50% matching contribution on a 6% auto-enrollment provision and a generous profit-sharing contribution. The profit-sharing contribution, which has historically been 10% of compensation annually, paired with the matching contribution, provides for high average account balances among participants in the Milliman plan.

“One of the best ways to increase retirement savings in America is through employers and Milliman is leading the way,” said FSR chief executive officer (CEO) and former Minnesota Governor Tim Pawlenty. “Save 10 will be an easy way for workers to think about saving. There are many companies like Milliman helping to put their employees on the right path to savings and Save 10 will recognize those employers in an effort to encourage others in the marketplace to follow suit.”

One of the cornerstones of Save 10 is to encourage “auto-save” programs. Auto-save includes programs such as auto-enrollment in a retirement plan upon being hired and auto-escalating employee savings contributions as incomes rise. Nearly 82% of employees save for retirement when their employers offer an auto-save program—compared with just 64% when employers do not. The Save 10 campaign aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify the company as certified for Save 10. These activities include offering a retirement plan, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

UK retirement planning model is more than a drop in the bucket

April 23rd, 2015 No comments

Pension reform in the United Kingdom has given individuals more access to their retirement money. As a result, post-retirement risk has also been shifted to the individual. This development is providing financial service professionals the opportunity to create new retirement planning models.

In this FT Adviser article, co-authors Colette Dunn and Chris Lewis offer perspective on a retirement framework that matches a retiree’s income needs to specific levels of risk. Here is an excerpt:

Using a bucket approach to discuss expected spending requirements throughout retirement can make it easier for individuals to understand their needs, their varying attitudes toward risk, and the necessary trade-offs. This approach can also be used by advisers to build a bespoke portfolio solution for a client…

The bucketing approach can be thought of as a ‘bottom up’ approach to determining the retirement solution, which is intuitive and easy to explain to clients. In addition, sophisticated modelling tools are available which an adviser can use to validate and/or fine-tune the overall asset allocation within and between buckets – that is, taking a ‘top down’ or diversified portfolio level approach.

Benefits of the framework
The framework can be used by advisers as part of the retirement planning process, and can be tailored to individual circumstances, taking into account both financial and emotional needs. It meets the three previously identified benefits, namely:

• Simplifying a complex retirement into a structured approach,

• Ensuring that an appropriate level of risk is taken for each prioritised retirement need, and that the overall level of risk for the portfolio is appropriate for the individual, and

• By segmenting into buckets, and thereby providing a higher level of certainty in the short to medium term, it provides individuals with peace of mind and helps to avoid the potential for overreaction to market shocks.

Google+ Hangout: What is InvestMap™?

October 6th, 2014 No comments

Milliman’s retirement glide path technology, InvestMap™, enables plan sponsors to deploy an age- and risk-based asset allocation strategy for the core funds held within a defined contribution (DC) plan. By creating a custom target date glide path overlay, plan sponsors and participants are able to personalize their investment approaches while taking advantage of automated account management features.

In this Google+ Hangout, Jinnie Olson discusses InvestMap with Brittney Hagenbart.

To learn more about InvestMap read Jinnie’s blog “What is InvestMap?

Milliman infographic: The boomerang generation’s retirement planning

September 30th, 2014 No comments

The Millennial generation has gotten a bad rap concerning their retirement planning habits—or lack thereof. Fortunately, there are several steps Millennials can take to secure a better retirement. The infographic below features 12 tips Millennials should consider when developing their retirement strategies. The tips are taken from Jinnie Olson’s article Retirement planning: 12 practical tips for Millennials. The infographic also highlights some of the generation’s retirement planning behaviors.

Millennials boomerang infographic_Milliman Inc_09-29-14

Thrift Savings Plan for all Americans?

August 19th, 2014 No comments

Moen-AlexRecently, members of Congress reintroduced the idea of opening the government-employees-only Thrift Savings Plan (TSP) to all Americans not currently covered by an employer-sponsored plan. Right now, that number is estimated at 78 million U.S. workers. According to the Bureau of Labor Statistics, as of early 2013, 68% of all workers had access to a defined benefit (DB) or defined contribution (DC) plan and 54% were enrolled. The vast majority of workers not covered are part-time or seasonal employees. The government recognizes that help is needed, and the TSP proposal is the latest attempt.

In place since 1986, the Thrift Savings Plan (TSP) has provided federal employees and military service members with retirement savings. It is a defined contribution plan, similar to 401(k) plans offered by corporations. A governing board, consisting of six people who are presidentially appointed, administers the plan. A variety of issues should be considered with this proposal, but there are a few important advantages and disadvantages.

Positives:
• The most important aspect of this proposal is that it would provide payroll-based savings to millions of American workers—people who do not now have access to employer-sponsored retirement savings accounts.
• The Thrift Savings Plan is a simple plan with an auto-enrollment feature, six investment choices, and low fees.
• Because it is run by government agencies, taxpayers are technically funding the costs of the plan, so opening it to all Americans is a fair proposal.
• Increasing the TSP population this significantly would have a profound impact on the retirement savings industry that is hard to predict. Both private and government providers may benefit from increased competition.

Challenges:
• Administration of the TSP would require a major upgrade at a minimum, and possibly an entirely new system.
• With TSP membership this massive, government agencies would have a greatly increased, more powerful role in the retirement savings industry, and selection of investment fund options might take on a political element (at least the perception of such). This is the biggest concern that has been voiced.
• Potential compliance issues would be introduced as the TSP is exempt from ERISA and Internal Revenue Service regulations that govern the private sector. Independent review/oversight of the TSP would have to be in place. The TSP is required to adhere to regulations under the Federal Employees’ Retirement System Act (FERSA). These regulations are more lax.
• The conservative investment options offered by the TSP deliver the security and returns associated with long-term Treasuries, which are not protected against inflation.

All employees deserve the availability of a retirement savings plan. The difficulty lies in determining the best option to accomplish that goal. Inviting American workers not covered by an employer-sponsored plan to the TSP may not represent the best solution. The administration-sponsored “myRA” is already taking a step in that direction. This starter retirement account offered by the Department of the Treasury gives workers access to the most conservative of the six TSP funds, the G fund. MyRA will serve as an important first attempt, on a manageable scale, and will provide important input to the comprehensive solution. The time may be right for Congress to undertake a complete review of this area. Hopefully, employers will be included in these discussions.

What steps can Millennials take to enhance their retirement security?

June 25th, 2014 No comments

The millennial generation has developed a reputation for not placing an emphasis on retirement, preferring to live for the moment. In the most recent issue of Benefits Quarterly, Milliman’s Jinnie Olson discusses several actions Millennials should consider to help them accumulate retirement savings. Here is an excerpt:

Taking retirement mobile
Millennials’ lives are fast-paced, hopping from an early morning yoga workout to nine hours of work, straight to a book club meeting, down the street to a softball doubleheader and then on to a late-night fraternity reunion happy hour. Retirement accounts are finally catching up with our mobile world. Recordkeepers and administrators have started to create mobile apps for smartphones and tablets to help keep up with busy lifestyles. For some, choosing to defer or increasing your deferrals is as easy as one quick touch of the screen or scanning a quick response (QR) code. When you have time to play with apps that shoot cartoon birds dressed like Darth Vader across the sky, then the excuse “I just don’t have time to save for retirement” simply won’t fly anymore.

Let your interest compound
You hear over and over again that the longer your contributions are invested in a retirement plan, the more time they’ll have to take advantage of compounding interest. But what does that really mean? Let’s look at three different savings approaches. For purposes of this example, let’s assume I make $30,000 every year until I retire:

• Strategy 1: I decide to save 6% of my compensation, or $1,800, in a jar every year from the ages of 25 to 65.
• Strategy 2: I don’t want all of the space in my basement taken up by jars and instead enroll in my company’s 401(k) plan, contributing 6% from the ages of 25 to 45. I receive 5% interest compounded annually.
• Strategy 3: I want a new car and can’t afford to contribute now. Twenty years later, I turn 45 and realize retirement is right around the corner and decide to contribute 6% until the age of 65. I receive 5% interest compounded annually.

Which strategy will result in higher retirement savings at the age of 65?

My initial investment ($36,000) is the same in each strategy. While Strategy 1 will guarantee my contributions will not suffer any market gains or losses, it may not be the most secure retirement savings strategy. Strategy 2 more than doubles my final account balance when compared with Strategy 3 just by giving my money an extra 20 years in the market to accumulate that compounded interest. (See the figure)

Compounding interest

To read the entire article, click here.

Reproduced from the Second Quarter issue of Benefits Quarterly, published by the International Society of Certified Employee Benefits Specialists.

Retirement readiness: How long will you live in retirement? Want to bet on it?

June 16th, 2014 No comments

Skow-KevinThe U.S. Department of Labor now offers a tool to help employees assess their paths toward providing for their retirements. Employees who use the website to input their ages, 401(k), 403(b) or IRA balances, annual contribution amounts, and years to retirement are provided a projection of the monthly income they might expect to receive in retirement. A sample result is provided in the graphic below. For more information, click here.

Retirement readiness blog_K. Skow

The calculations include adjustments for future investment earnings and inflation. Details about the assumptions used are available by clicking the “View Instructions” link.

The tool makes a simplifying assumption that may cause employees to underestimate how much they will need at retirement. It assumes each employee will survive in retirement according to an average life expectancy (roughly age 85 to 90, depending on retirement age, gender, etc.). That may be true for half of us, but what about the other half? Relying on any tool to calculate how much we can spend in retirement may cause our retirement account balances to run out sometime around our late 80s. What happens then?

401(k) and 403(b) plans were initially designed to provide supplemental income in retirement. Over the years they have become the primary retirement plan for most employers. More and more employees are relying on their employer retirement plans for retirement security. Getting good information about the adequacy of these plans is critical.

Employees should review the assumptions behind the calculations used in retirement planning. Terms like “life expectancy,” “annuity conversion,” or “average lifetime” imply the results will be sending roughly half of the tool’s users on a path to disappointment. While these plans are not designed to provide a guaranteed income at retirement, addressing the possibility of living well into one’s 90s will help employees plan for a more secure retirement.

Milliman’s PlanAhead for Retirement® tackles this dilemma by asking this question. The input can be modified if desired, but this foresight better projects the reality that employees may face. As a result of this realization, employees may modify their saving, investing, and spending patterns to better prepare them for life in retirement.

Sample results show this impact in the graphic below.

Retirement readiness blog 2_K. Skow

Retirement readiness blog 3_K. Skow

This is one of the many assumptions that need to be considered when evaluating an employee’s benefit adequacy in retirement. We will continue to explore other aspects in this series on the subject of retirement readiness.

Give your nest egg some TLC!

May 9th, 2014 No comments

Regli-JinnieAll around us, there are signs that spring is hatching. Snow piles are melting, potholes are mounting, insulated jackets have been shed, green grass is peeking through, and bird nests are popping up in the trees.

It’s important to remember that, just as a mother bird continues to nurture her unhatched eggs, your retirement accounts need a little nurturing until they’ve reached their maturity. Perhaps it’s time for a little retirement account spring cleaning!

According to this New York Times article, statistics show that, on average, people in their 20s will go through seven jobs in their lifetimes. It’s not uncommon to get wrapped up in the new and forget about the old—more specifically, your retirement account—as you move forward to new opportunities.

If you’re not sure how to access old accounts anymore, your prior employer will be able to point you in the right direction. It would be unfortunate to leave a nest egg behind only to have it eaten up by plan fees!

Here are a few things to keep in mind:

  • It’s helpful to update your contact information if you move, get a new phone number, or change your name. Some of these changes may require that you provide proof of change and it’s easier to stay on top of the changes as you go.
  • Remember to review and update your beneficiaries as you go through life changes to make sure your retirement accounts are inherited by the appropriate parties if an unfortunate incident occurs.
  • Every few years, you may want to re-evaluate your personal investment selection. The fund or portfolio you picked when you started that first job at age 22 may no longer fit your investment strategy.
  • How much do your retirement accounts cost you? Even in employer-sponsored retirement plans, participants often are responsible for paying portions of plan fees. If you have five separate accounts and each of the plans deduct $25 from your accounts each year ($125 in total) it might be wise to consolidate your accounts and only pay one $25 fee.
  • If you have a small balance, typically under $5,000, you may be automatically rolled out of the plan and into an IRA, without your consent. If your account balance is less than $1,000, your account may be automatically paid directly to you, less taxes owed. Make the first move after leaving so that finding your account doesn’t make you feel like you’re chasing your tail.
  • If nothing else, check in on your accounts at least annually. Even if you are no longer working at the company, plan design changes, fund changes, and many other decisions the company makes for its plan still affect your account and could affect your account balance.
  • While it’s still fresh on your mind, consider combining all of your prior qualified accounts into your current plan or IRA. One of the major benefits of qualified 401(k) plans is that they are portable and most retirement plans make rolling balances in or out a fairly easy process.

Just think. You work hard for your money and if you contributed to a retirement plan, that money was withheld from your take-away pay. Consolidation increases the likelihood you’ll be able to devote the attention you need to grow your retirement nest egg.