It's hard for most of us to get a grip on how important it is to save for retirement, especially when retirement is 30 or 35 years away. Tom Totten, CEO of Nyhart, an actuarial and employee benefits consultancy based in Indianapolis, experimented with ways to get employees of one of his clients to understand why they should save a larger percentage of their pay. You might call what they did retirement planning shock treatment.
Most of Nyhart's clients are small service and manufacturing companies with fewer than 300 employees. Nyhart administers their 401(k) plans as well as some old-fashioned pension plans, but increasingly, the biggest part of the business is on the 401(k) side. Totten sent a team of actuaries, armed with calculators, to sit down with each employee to show him how old he would be before he'd saved enough money to retire on 70 percent of what the actuaries projected to be the his final year's income, plus Social Security. For most of the workers, the number was eye-opening.
On average, an employee at this small company would not be able to retire until he was 73 years old given the current savings rate. Employees who earned between $60,000 and $70,000 per year had the lowest projected retirement age -- 69.9 years. Those who earned less than $25,000 per year had the highest projected retirement age at age 77.9. Only 19 percent of the employees were on track to retire at age 65.
The solution is easy, says Totten. Save more money, especially when you are young and have time and compound interest on your side. But, even ramping up your savings later in your career helps. If every employee at the company Totten works with increased his savings rate by 2 percent of his pay, the percentage of employees able to retire at 65 would rise to 28 percent. An increase of 4 percent meant that 36 percent of people could retire at 65.
Showing these numbers motivated the employees, Totten says. Many of the youngest, some of whom were currently saving nothing, were willing to immediately start saving far more. The most upset by the calculations were employees in their mid-50s, who had to face the reality they simply couldn't catch up, Totten says.
Why would a company go to this trouble to motivate employees to save? Totten says it's good business because it helps a company keep good employees by making their career paths clearer and taking away one of the distractions as employees age. "Businesses want people to be able to retire," he says.