Those with access to automatic employer-based savings vehicles, on average, pay in 7.4% of their total annual salaries, while workers without such programs contributed a mere 0.9%. The difference is hundreds of thousands of dollars and could send a huge chunk of retirees back to work during their golden years.
Inequality is raising its ugly head again, this time in retirement.
It’s no secret having access to an employer-sponsored retirement plan, such as a 401(k) or equivalent, can boost one’s nest egg. Yet American workers can now see exactly how much they could be missing out on.
According to new data released by asset manager BlackRock and 401(k) provider Human Interest, median-income employees without employer-sponsored retirement plans saved one-eighth as much as those with such plans. Upon retiring, these workers could be around $625,000 behind their employer-sponsored peers. The stark gap in contributions is illustrative.
These findings come amid rising retirement insecurity as the global economic outlook darkens. Considering the broader trends and causes of retirement unpreparedness, combined with the advice of financial planners, can offer savers strategies to stay on the path to a financially secure future.
Retirement jitters
The latest BlackRock Read on Retirement survey paints a dire picture.
Retirement savers’ confidence is falling rapidly. In 2021, 68% of workplace savers reported feeling on track with their savings. This year, that figure has sunk to 56% – a double-digit drop. BlackRock found that 93% of savers fear market volatility could smash their nest egg, while 86% worry inflation will eat away the value of their savings. Advisors warn of other nasty surprises beyond inflation and stocks, however.
‘Torpedo Income-ing’
What do advisors see as the biggest blind spot in savers strategy?
“In one word: taxes. Most workers are not considering the ramifications of taxes later on in life. ROTH 401(k) ‘s which are now available to more and more people are being underutilized,” says Carman Kubanda, CFP, ChFC, and Financial Planner at Innovative Wealth Building. “One million in a traditional 401(k) vs a ROTH 401(k) is a big difference, potentially hundreds of thousands of dollars.”
“So many workers, particularly high-income ones, are putting a bunch of money into traditional, pre-tax retirement accounts and ignoring Roth or after-tax retirement accounts,” Stephen Chang, MD, MBA and Managing Director of Acts Financial Advisors. The result is they will end up owing a sizeable tax bill at the time they will least be able to “afford” it, which is during retirement. Scenarios like the “tax torpedo,” wherein marginal tax rates spike due to taxation of social security benefits, are more likely to occur as a result.”
Having a 401(k) cannot be taken for granted. According to the American Association of Retired Persons, 57 million workers are fending on their own, as their employers do not offer any retirement savings plan.
The BlackRock survey found nearly half of all these independent savers (47%) of independent savers are just holding cash. Forgoing a dedicated retirement savings vehicle may result in lost investment gains and missed tax advantages.
There are a range of alternatives to the 401(k) that can help secure self-savers’ nest eggs. These include Traditional and Roth Individual Retirement Account (IRA) accounts or Savings Incentive Match Plan for Employees (SIMPLE) IRA. There are also Simplified Employee Pension (SEP) and Solo 401(k)s, which tend to favor the self-employed or lone business owners.
“My favorite is the HSA because you get a triple tax advantage,” says Kubanda. “Then ROTH IRA’s because they let you put up to $7,500/year (for those over 50) into a “tax-free” account.”
“SEP IRA’s are a great tool for self-employed folks or small business owners because they are flexible and can produce some very tax-efficient results for high income years,” she adds.
Savvy savers will want to seek the opportunity to leverage the HSA triple tax advantage. This means no tax is levied on HSA contributions, earnings, or withdrawals, just as long as they are used for qualified medical expenses. If the HSA is employer-provided, contributions are pre-tax, yet with a personal HSA, contributions are made with post-tax dollars (but are tax-deductible nonetheless).
Some other alternatives include real estate or annuities. Owning a physical property comes with several potential tax write-offs, but the property isn’t as liquid an asset. Meanwhile, other real estate investments, such as Real Estate investment trusts (REITs), are more liquid but have fewer tax breaks. Meanwhile, annuities are bought through an insurance company and offer stagnated payouts over the time frame for life. In this way, they can stand in for a pension in retired life.
Yet, some advisors say these should only complement, not supplement, orthodox savings vehicles.
“Real estate and annuities can be helpful adjuncts to a 401k as part of a well-diversified investment portfolio and retirement plan,” says Chang. “I would prefer my clients to have them in addition to a 401k or 403b, not of, though.”
Marathon, Not a Sprint
The road to retirement is a multi-decade trek. The twists and turns along the way are as eventful and unpredictable as life itself.
Many find guidance from financial planners valuable, that is, if they seek them out and keep in constant contact.
“Financial advisors are not magicians or mind readers. If you work with a financial advisor, reach out as often as necessary,” said John Stoj, founder of flat-fee consultancy RIA Verbatim Financial.
“Don’t let questions or concerns fester. Let advisors know about changes in your life. Ask for the help you’re paying for. Don’t pay for help you’re not getting.”
There are also market-based products that are designed to act as retirement vehicles. BlackRock, for instance, just released a new set of term date funds aimed at helping savers with retirement goals. These funds automatically adjust allocation toward a more conservative stock-bond split over time.
Whichever path retirees choose, it pays to be prepared and remain consistent over the long term. With many things, life often gives people a second chance to start over. Preparing for retirement is an exception – you really need to get it right the first time.
This article was produced and syndicated by Wealth of Geeks.
