The Building Blocks of a Retirement Tier
When employees think about what it means to have enough money to retire, more than likely they are unsure how to translate their lifetime savings into income. For their entire working life, these employees receive regular paychecks; from this income, they generally construct a budget to cover their basic expenses. At the point of retirement, they suddenly find they need to shift their mindset from saving to spending (a difficult transition for many given the number of years of having a savings mentality). And studies show that many people’s greatest fear in retirement is running out of money. That fear often leads to pinching pennies unnecessarily (i.e., underspending, or a “retirement consumption gap” ). As Nobel laureate Robert Merton has stated, the goal of a retirement plan should be to allow participants to maintain the standard of living that they enjoyed just prior to retirement.
Plan sponsors now have an opportunity to address these concerns. As more plan sponsors encourage participants to remain in their plan post-retirement, it is imperative that participants be offered appropriate tools to meet a wide array of financial needs. If an employee feels financially comfortable and is willing to retire “on time,” this helps the employer with recruiting new employees, or workforce management. Similarly, if employees find the plan is structured to accommodate retirees, they are more likely to maintain their accounts in the employer plan; this may benefit all plan participants by keeping expenses and other service fees lower. Therefore, designing the plan with appropriate features and tools for retirees can be a transformational enhancement to a defined contribution plan.
THE RETIREMENT TIER STRATEGY
Over the past several decades, plan sponsors have successfully focused on helping their employees save for retirement. However, as lifespans lengthen and many people expect retirement to last 20 to 30 years or even longer, experts recognize that participants entering retirement would like—and, in fact, need—additional support to create an income stream that will replace at least some of the paycheck they have become accustomed to receiving on a regular basis. These experts also agree that the time has come for the industry to collectively transform these savings plans into retirement plans.
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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
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