Assessing the Retirement Readiness of Each Employee

It starts by determining each individual’s needs.

One of the most important things a company can do to ensure its well-being is to assess the retirement readiness of each of its employees, not just those approaching retirement, according to Sibson Consulting.

“Quantifying retirement readiness involves understanding what savings employees will need to attain a secure retirement, gathering relevant financial and other data on all employees and then running the numbers to determine how each employee stacks up,” says Doron Scharf, senior vice president with Sibson.

Sibson suggests that employers consider one or more of the following three metrics: replacement ratio, wealth accumulation target and retirement readiness grade. The replacement ratio is the required income for retirement as a percentage of income just before retirement. Citing a 2016 Government Accountability Office study, Sibson says the replacement ratio should be between 70% and 85% and will include Social Security. Sibson notes that while 65 is the typical retirement age, some employees will retire earlier, and they will need additional savings to cover a longer retirement.

The wealth accumulation target is the total savings an employee will need to last throughout their retirement. Sibson says one study has shown that if a person were to retire at age 65 and wants to replace 85% of their income, they would need 11 times their final pay. At age 67, they would need only eight times final pay.

The retirement readiness grade is a letter grade given to each employee to show their progress.

“Once these metrics are set up, employers should then develop and implement strategies to help employees stay on track,” adds Jonathan Price, vice president at Sibson. “Strategies could include plan design changes, educational materials or communications campaigns to encourage behavioral changes.”

As Sibson says in its report, “Many organizations have no idea how financially prepared their employees are for retirement. They may have a number of later-career employees who are nowhere near ready and, consequently, have to work for many more years. On the other hand, there may be a few mid-career employees who already have enough savings to retire and could decide to do so on short notice. Employees who find they must work longer than they expected or who retire unexpectedly early may disrupt the natural progression of the workforce.”

Sibson’s “Quantifying Retirement Readiness” report can be downloaded here.