The Long-term Benefits of Early Retirement Planning for Employees
While retirement may seem light years away for younger employees, starting a savings plan early on could be the most important financial decision they make for their future.
Saving for retirement and feeling confident about the future is a huge part of an employee's overall financial wellness.
Yet according to a recent ADP study, 60% of employees have less than $100,000 in retirement savings. Workers ages 55 to 64 on the cusp of retirement have a median savings balance of just $185,000.
By encouraging them to begin retirement planning and saving early on, employers can help workers improve their financial health, lessen financial stressors and build a stronger foundation for the years ahead.
Retiring early
How early can you retire? It really depends on how much employees have managed to save and how long that money can sustain their retirement lifestyle. While there's no set retirement age, the earliest age to receive Social Security retirement benefits is 62 years old.
But there's a catch. The Social Security Administration warns that Social Security was never meant to be a sole source of retirement income.
A common rule of thumb suggests that retirees will need about 80% of their pre-retirement income to maintain their standard of living through their non-working years. Social Security is designed to replace about 40% of the average worker's pre-retirement income, depending on earnings history and the age at which someone claims their benefits. So retirees will typically need additional sources of income to reach the recommended 80% replacement goal.
The power of time
Compound interest is a huge benefit to an early savings strategy. The more money saved early on, the more time that money must grow exponentially, as interest earns interest on itself.
For example, assuming a 7% annual return, a 25-year-old investing $5,000 each year could accumulate over $1.1 million by age 65. But waiting until age 35 to start investing would reduce that amount by more than half a million dollars. This dramatic difference in outcome isn't just about the additional money invested. Rather, it's about giving investments more time to leverage the power of compound growth.
Starting to save for retirement early on also allows individuals to take advantage of a wider range of investment options. Employees will have a better chance to safely diversify their retirement portfolios and take more risks, potentially earning higher returns. For employees trying to achieve an early retirement age, the key is to start saving as soon as possible.
Promoting savings strategies
The impact of compound interest could be a powerful motivator for younger employers to start saving. But that's only part of a multi-faceted approach to encourage savings:
Offering a retirement plan.
Employers are generally not required to offer their employees any retirement benefits. But as a result of SECURE 2.0 legislation, some states have enacted state-mandated retirement plans for employers not currently offering a plan.
While helping employees save, these one-size-fits-all state plans might not fit every business's unique needs. An employer-sponsored plan typically provides more flexibility and options that can entice employees to get an earlier start on their savings.
Educating plan participants.
The key is making saving for retirement feel achievable — not a distant goal. From age-specific retirement planning workshops to life stage-relevant financial planning sessions, employers can promote educational initiatives focused on the benefits of saving early.
By tying retirement planning into other life goals shared by younger employees — paying off student debt, buying a home or traveling — employers can demonstrate how an early savings strategy can help meet these objectives.
Providing tools and resources.
Retirement plans that offer automatic enrollment can help employees get started as soon as they become eligible. To help employees track their progress, adjust contributions and visualize their future retirement lifestyle, interactive calculators and budget trackers are effective tools, combining technology with personalization.
Educational materials like investment basics videos and FAQ documents are also valuable resources to help encourage employees to prepare for retirement.
Keep in mind that financial wellness goes beyond simply retirement savings. An engaging, holistic financial wellness program also provides resources to help employees better manage their money and plan for all their financial goals.
Dispelling the myths and misconceptions.
I'm too young to worry about retirement. I need to pay off all my debt before I can save. These statements are all too common among today's younger employees. Employees should feel supported and empowered to start saving, regardless of their current financial state.
By putting away just one percent of their annual salary and increasing it gradually, employees will benefit from significant accumulation over time.
The early bird gets the retirement worm
Early retirement planning isn't just about saving money. It's about creating future opportunities and financial freedom. The earlier they start, the more options today's workers will have later.
Connect with an ADP retirement planning services specialist to discuss ADP's retirement plan solutions or call 844-462-3887.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
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