Many company benefits departments struggle to convince employees of the importance of saving for retirement through the company 401(k) plan. One reason is that participants underestimate the amount of savings necessary for retirement. This results in some retirees spending all of their savings within a few years of retirement, at which time they are forced to live solely off social security benefits or go back to work.
Many financial advisors recommend that retirees withdraw no more than 3.5% to 4% of savings each year. In other words, a retiree who has $100,000 in his 401(k) account should withdraw no more than $4,000 per year. Withdrawing at a higher rate can result in a retiree outliving his savings or his savings not keeping up with cost-of-living increases.
The recommended reaction to this sobering reality is both simple and difficult: save more. Most of us will need significantly more than anticipated for retirement. With life expectancies increasing, this problem will only get worse. A retiree who starts taking distributions at age 67 could spend all of his money within 10 years and still have another decade or two of retirement.
Explaining these realities to participants is consistent with a retirement committee's fiduciary responsibilities. When employees have a realistic understanding of retirement spending, they are much more likely to increase their savings rates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
