By Craig Eissler, CFP®, CIMA®, AIF®, Wealth Advisor
Why Gen X faces retirement funding challenges
An article in the WSJ published a few weeks back reported that many Gen Xers are falling short in terms of adequate funding for retirement. In As Generation X Approaches Retirement, Reality Still Bites, Hannah Miao explains why this generation, many of whom are getting ready to retire, is financially ill-prepared compared to prior generations. One main cause, she argues, is our nation’s transition from the historical use of defined benefit pension plans to defined contribution 401(k) plans for employees.
How 401(k) plans can be bad for individuals
The 401(k) retirement plan, introduced in the late 1970s, was heralded as a revolutionary way for workers to take control of their retirement savings. However, over the decades, this system’s drawbacks have become clear, particularly for those who struggle to save money on their own.
Before the advent of the 401(k), many workers relied on defined benefit pension plans. These plans were funded and managed by employers, providing a specific retirement benefit based on salary and years of service. The responsibility of saving and investing was on the company, not the individual worker.
With the introduction of the 401(k), the landscape of retirement savings shifted dramatically. The 401(k) is a defined contribution plan, meaning that the onus of saving and investing falls squarely on the shoulders of the employee. While employers may offer matching contributions, the primary responsibility for funding and managing the account lies with the worker.
The shortfall of the 401(k) system is now being highlighted – these plans are predicated on the assumption that all workers have the financial literacy, discipline, and means to save adequately for retirement. Unfortunately, this is not always the case. Many workers live paycheck to paycheck, making it difficult to set aside money for the future.
What employers can do to help make a difference for retirement savings
To address these issues, these are among some potential solutions that should be considered by all organizations concerned about the future financial stability of their employees:
- Automatic Enrollment and Escalation: Implementing automatic enrollment in 401(k) plans and automatic escalation of contribution rates can help increase participation and savings rates.
- Financial Education: Providing comprehensive financial education to employees can help empower them to make better investment decisions and understand the importance of saving for retirement
Prudent financial planning remains important
While the 401(k) has provided a valuable tool for many workers to save for retirement, it is not without its flaws. The reliance on individual savings and investment decisions has left many workers unprepared for retirement. By addressing these challenges through automatic enrollment, automatic escalation and financial education, we can help create a more robust retirement savings system.
As we talk about here at Halbert Hargrove, sticking to a well-thought-out savings plan is crucial to help you have the resources to maintain your desired lifestyle in your golden years. Consistent contributions and regular reviews of your budget and retirement goals can help keep you on track. Saving money through vehicles like 401(k) plans is important, but it’s equally important to ensure you’re saving enough to meet your future needs. Planning ahead can assist in estimating how much you’ll require to enjoy a comfortable retirement
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
