By Anne Rosivach
Statistics from multiple studies paint a dire picture of the number of Americans in every age group who think they are prepared for retirement. Employees are focusing more on retirement planning, according to the State of US Employee Retirement Preparedness report published by Financial Finesse, but that focus is being overshadowed by steps back in money management behavior.
The report is based on Financial Finesse's survey data, which found that 39 percent of employees had run a retirement projection, and only 18 percent felt they were on target. Of the 82 percent who do not think they are prepared for retirement, 74 percent have not taken the FIRST step: running a retirement projection. While more employees are contributing to retirement plans and IRAs, more have taken hardship withdrawals from their 401(k) plans.
The CPA's Role in Retirement Preparation
"It's true that people are not prepared. People are paralyzed by fear", Diane Armstrong, CPA, CFP®, a personal financial planner in Columbus, Ohio, said when commenting on the survey. "CPAs are the first line of defense. They are in a very good position, just from looking at a tax return, to know whether or not there is a retirement plan or a deficiency.
"CPAs can see the level of contributions to an IRA or other retirement savings from a tax return. They see investment income on brokerage statements and other investments. They can recommend that a self-employed client set up a small retirement plan.
"CPAs should conduct overall financial well-being conversations with clients of all ages and make referrals, if necessary, to professionals who understand investment plans and financial planning in general."
Money Management Behaviors
"It is essential that people understand where they are", Armstrong said. "They must have a handle on their cash flow, on their net worth, before they can make decisions about changes to saving or expenses. The statistics in the Finesse survey about emergency funds - the very first step in a financial plan - were really alarming. Thirty-seven percent said they did not have emergency funds.
"With regard to saving and investment, we see the mattress syndrome returning", Armstrong said. "Clients are less aggressive with their investments. Some younger clients want to stop contributing to their retirement plans altogether, yet younger clients should contribute up to the match. Time is their best friend. People leave the stock market when it is down, and that is what they should not do. The market is the only place where when things are on sale, people don't buy.
"We were also alarmed by the statistics about women." Only 13 percent said they are on track for retirement. A whopping 63 percent said they do not know and have not run a retirement projection. "Women really need to be educated about retirement", Armstrong said. "They tend to take care of everyone but themselves."
Dealing with Financial Anxiety
"We are aware that many people are overwhelmed by fear, and that makes it difficult for them to make rational decisions. We try to deal with that fear for our clients. We begin by asking them some basic questions: What is retirement? Where do they want to be? What is their time frame?
"We set up projections based on where clients are today in terms of savings and cash flow. We then run 'what if' scenarios, changing the assumptions about the market, taxes, and important areas of the projections. We assume that there will be ups and downs in the market and changes in taxes and possibly Social Security. This process takes some of the uncertainty and fear out of our clients' retirement projections and they are better able to make decisions.
"We also run a Monte Carlo analysis - applying historical rates of return in different asset classes.
"We try to help people though the ups and downs, to understand their risk tolerance, and encourage them to stick to their investment allocation. Financial planning is a lifelong process."
About the Research
The Financial Finesse survey is based on input from 4,199 employees, of whom 1,295 were men and 2,700 women (the rest did not prefer to answer) between the ages of 18 and 65. All data came from employees who used Financial Finesse's Online Financial Wellness Assessment and Learning Center, which provides employees a personalized financial education plan and analysis of their current financial wellness. The Financial Wellness Assessment is designed by Financial Finesse's CERTIFIED FINANCIAL PLANNER™ professionals and is used to measure employees' financial wellness.