At one time, many employees that stayed with a company long-term could expect a substantial pension on retirement. However, that is no longer the case.
Americans are living longer, and the cost of living continues to rise. As a result, significant planning is necessary to ensure a successful, comfortable retirement. Here are some challenges facing those nearing retirement and options for companies and workers alike to consider when a 401(k) or similar plan is not offered.
Post-Retirement Income Concerns
Baby Boomers (born 1946-1964) and Gen X (born 1965-1980) are the generations with the most pressing retirement concerns.
The 21st Annual Transamerica Retirement Survey of Workers found that 72% of Boomers expect to work past 65, are already doing so, or don’t expect ever to retire. Only 30% have a backup plan if forced into early retirement. And 34% say their primary source of income will be Social Security. (The average annual payout as of February 2023 was less than $22,000 per person.) Of those who have retirement savings, the estimated median household balance is $202,000. Given current lifetime expectancy, that could constrain retirement income from savings to as little as $8,000 annually per person.
In a recent Prudential survey, over 33% of Gen Xers reported having less than $10,000 in retirement savings. Nearly one-fifth (18%) still have no retirement savings, and 46% don’t think they’ll have enough income to retire comfortably.
Retirement Planning Challenges
Since 1978, when the legislation creating 401(k) accounts was passed, the existence of employer-funded pension plans has steadily declined. In this absence, many employees found themselves without the ability or resources to pick up the slack since 401(k) accounts are primarily employee-funded. For example, a recent AARP study determined the following:
- 57 million private sector employees aged 18-64 have no traditional pension or retirement savings plan.
- Small business employees are less likely to have retirement plan access than those working for larger businesses.
- The lower the employee’s education level, the less access they have to retirement planning resources.
- Over half of Hispanic and Black workers, along with almost half of Asian American workers, lack retirement planning access.
Companies with less than 500 employees make up almost half of America’s private sector employees. However, only 26% offer a 401(k) plan. Yet, offering retirement-focused benefits can be essential to an employer’s ability to attract and retain the workforce they need.
Health Savings Accounts
For persons enrolled in a qualified High Deductible Health Plan (HDHP), Health Savings Accounts (HSAs) can serve as an effective alternative tool for retirement planning. HSAs are tax-advantaged accounts sponsored by an employer or opened directly with a financial institution by an employee. Regardless of how it is opened, the account is owned by the individual who makes tax-free deposits, or contributions, into the account.
As the name implies, the primary purpose of HSAs is to cover qualified healthcare expenses with tax-free funds. While not a traditional retirement tool, they can be an effective supplement to 401(k) or other savings due to their “triple-tax advantage”:
- Funds withdrawn for qualified healthcare expenses remain tax-free, regardless of the owner’s age or employment status.
- Unused funds gain tax-free interest and investment income, growing the balance over time (like a 401(k) account).
- Once the owner reaches age 65, withdrawals for reasons other than healthcare are taxed only at the owner’s then-current tax rate (again, like a 401(k) account).
The employee can make deposits into their HSA either through pre-tax payroll deduction or post-tax direct contribution (with the tax break taken on their tax return). Employers can also make contributions to employee HSA accounts. Those that do often use a contribution-matching formula to encourage employee savings.
Student Loan Reimbursement Assistance
By providing Student Loan Reimbursement Assistance (SLRA), employers can help workers save more toward retirement savings by helping reduce outstanding loan balances faster.
When the IRS first authorized SLRAs in 2018, employers could only participate by making a matching contribution to the employee’s 401(k) in response to the employee’s loan payment. However, under COVID-relief legislation enacted in 2020 (and extended in 2021), employers can now provide either employee loan payment reimbursement or direct payment to the loan provider up to $5,250 annually tax-free through the end of 2025.
Lifestyle Spending Accounts
Although not a direct alternative to retirement savings, Lifestyle Spending Accounts, or LSAs, can serve an important purpose. LSAs can help employees access financial planning services, budgeting classes, etc., to improve their ability to prepare and save for retirement. Funded by the employer, LSAs are post-tax accounts that reimburse employees for eligible expenses chosen by the employer. Qualified expenses can include nearly any product, service, or activity in any combination. They can include financial, physical, and mental well-being, to home office, household, and family expenses.
Planning and saving are essential to achieving a comfortable, successful retirement. Employers and employees both have a role to play. Especially when an employer does not offer a traditional 401(k) plan or pension, both parties should look into potential options such as health savings accounts, student loan repayment assistance, lifestyle spending accounts, and more.
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