June 27, 2022 | 8 Minute Read
Two-thirds of Americans do not have retirement savings or do not believe their retirement savings are on track.1 While corporate sponsored retirement programs have made significant progress over the years with innovations such as automatic enrollment, automatic contribution escalation, and target-date funds, many individuals still struggle to fully prepare for their retirement. This problem is even more acute for certain demographics, such as women. In particular women are four times more likely to feel their retirement savings are behind schedule relative to their male counterparts.2
One of the contributing factors is that retirement plan design applies a path to retirement often intended for an average plan participant whose retirement savings are assumed to be on track. This path is typically set at the plan level, not at the individual level, and therefore may not meet individuals where they are. In some cases, these plan features are designed to get individuals started with the expectation that individuals will personalize their retirement strategy at a later date.
Many Americans fall behind in their retirement savings over the course of their lives, due to various reasons. Life events can be impediments to retirement savings and can have a significant impact on one’s ultimate retirement savings. In some instances, people are managing other competing financial responsibilities that impact their retirement savings. In other cases, the actual amount of savings needed (i.e., projected retirement need) actually changes due to salary changes, marriage or divorce, for example.
Our recent Retirement Survey and Insights Report2 highlights how common it is for retirement savings to be impacted by other life events:
We analyzed the impact that common life events can have on an individual’s retirement savings. The starting point for our analysis is the “textbook” retirement saver, who saves and invests consistently over their career beginning at age 25. Their starting salary is $50,000 and increases 3% annually (assumed inflation) over the course of their career, which is used to determine their projected retirement saving goal. We assume savings should equal approximately ten times their final pre-retirement compensation (at age 65) as a “fully funded” proxy (as ten times pre-retirement compensation is a general rule of thumb to have sufficient savings entering retirement and generally requires that an individual save approximately 10% – 15% (individual savings + employer match) over their career and invest in a diversified portfolio). We then evaluate common career and life events to understand how they can impact the goal of having sufficient retirement savings.
The result is that various common events, as described further below and as depicted in Exhibit 1, can reduce the individual’s retirement savings significantly. Without any additional adjustments, the individual’s retirement savings fall behind.
Source: Goldman Sachs Asset Management. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially.
Late Start: Student loans, rent, saving for a first home, etc. are all reasons that can prevent an individual from saving for retirement early in their career. Because of the value of compounding, the early years are critically important to the overall savings accumulated.
Salary Increases: Job changes and promotions can result in salary increases, which is a positive outcome. However, because of the salary increase, there is a new measure of the retirement income needs. These changes push the current savings behind schedule.
Early Retirement: The age an individual retires can have a large impact on their final retirement savings. We know that many individuals retire earlier than planned typically before full retirement (age 65 or 66). The result is less opportunity for saving in the final years of one’s employment and less investment experience when balances are typically at their largest.
Stopped Savings: There are a number of reasons an individual may need to stop or pause savings over their course of their career. Caregiving and spending time out of the workforce, managing financial hardships (e.g., unexpected home repair) and paying for college are examples that can result in individuals needing to stop saving to handle more immediate financial needs. These occurrences can reduce savings, but seldom reduce retirement income needs and therefore, puts the individual at risk of falling behind in their retirement schedule.
Source: Goldman Sachs Asset Management 2021 Retirement Survey & Insights Report
While many retirement savers will experience an event that pulls their savings off track, let’s explore a few examples to see how a technology-enabled platform can better support a more personalized retirement planning experience.
Source: Goldman Sachs Asset Management; For informational purposes only.
Goals-based solutions can help individuals bridge their retirement savings gap because the savings and investing guidance is aligned seeking to achieve the desired retirement savings goal. Goals-based solutions provided through a technology-enabled managed account platform can provide two key benefits: (1) personalization to provide a retirement strategy unique the individual’s circumstances and (2) ongoing adjustments that recalibrate the individual’s strategy based on life or market events.
Technology can personalize the retirement savings experience by identifying an individual’s retirement income goal based on their salary, target retirement age, spousal information, etc., and assess how they are tracking towards that goal by taking into account current savings accumulated, rate of future savings and outside savings accounts, if applicable. From an investment perspective, personalization can better align the asset allocation strategy to take more investment risk to close a retirement savings gap and less investment risk if the individual is on track or projected to meet their goal. The objective is to increase the likelihood that the individual achieves their needed savings amount.
Thus, personalization provides the individual a unique path forward based on their current situation. While some of these personalization factors may be available from the plan’s recordkeeper, these factors can be further personalized by the individual to account for their life events.
As with most things in life, circumstances change, especially over the course of a career. As individual circumstances change, another benefit of a technology-based solution is that it can recalibrate the individual’s retirement asset allocation and contribution strategy to dynamically account for these changes and keep the strategy aligned towards the individual retirement goal. It could be a life event or market event that alters the situation, but given the importance of investment compounding to retirement savings, leveraging technology to timely recalibrate can help avoid delays and maximize the amount of time the adjustments can work towards closing any retirement savings gap or reducing investment risk to keep existing savings.
We believe modern retirement plan design should account for individual needs and multiple paths to retirement. As an industry, we can seek to offer solutions that address the diversity of retirement needs and better meet individuals where they are on their savings journey. We can help plan participants account for the myriad of events that push savings behind schedule or help keep what they have already accumulated. Personalized goals-based solutions can help improve the retirement saving outcome.
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Why Personalization and Goals-Based Solutions Matter
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