Getting a Handle on Retirement Readiness

Art by Sarah Mazzetti

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 who are approaching retirement, according to Sibson Consulting in “Quantifying Retirement Readiness,” a recent Sibson Ideas study.

“Quantifying retirement readiness involves understanding what savings employees will need [in order] 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 the firm.

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 (GAO) study, Sibson says the replacement ratio should fall between 70% and 85% and include Social Security. The firm notes that, while 65 is the typical retirement age, some employees will retire earlier, and they will need additional savings to cover a longer time post-employment.

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

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

“Once these metrics are set up, employers should develop and implement strategies to help their employees stay on track,” says Jonathan Price, vice president at Sibson. “Strategies could include plan design changes, educational materials, or communications campaigns to encourage behavioral changes.” As Sibson’s report notes, “Many organizations have no idea how financially prepared their employees are for retirement. They may have a number of employees who have to work for many more years.”