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7 Things Your Employees Should Do Now If They’re Nearing Retirement

Peter Lazaroff, CFA, CFP® Chief Investment Officer

BrightPlan’s 2022 Wellness Barometer Survey found that 72% of employees are stressed about their finances, up from 65% last year. Rising inflation, market volatility, and retirement planning are among the top reasons contributing to financial stress. 

Though current economic conditions are out of our control, we can control how we plan for retirement. Retirement planning isn’t always straightforward, and it can be particularly stressful during periods of economic uncertainty. However, there are some things you as an employer can do to help your employees prepare. Here are some tips and guidelines.


1. Help Employees Assess Their Situation 

To build an accurate retirement plan, employees need to understand their baseline. They should  calculate their total net worth by subtracting what they owe (e.g., debt, mortgage, and credit card balances) from what they own (e.g., cash, retirement accounts, and assets). This will help them develop a clearer picture of their financial status before they chart their retirement journey.

Employees should also test the viability of their existing retirement plan. Whether that’s comparing their savings to retirement benchmarks or doing a more in-depth Monte Carlo analysis, making any necessary course corrections is far less painful now than it will be later on.


2. Guide Employees To Create A Retirement Budget

According to Investopedia, a majority of people believe that their annual spending during retirement will be 70% to 80% of their current expenditures. However, it’s important for employees to factor in expected (and unexpected) expenses that may occur and make a list of planned costs so that they can budget accordingly. 

For employees that don’t have a great grasp on their annual expenses, a quick calculation involves simply subtracting taxes and savings from gross salary. Even better, linking financial accounts to an expense tracker will offer a more accurate picture of expenses.


3. Raise Awareness Of Tax Advantage Options 

The decade before retirement is crucial because it’s the best time to manage current and future taxes. If a large portion of an employee’s nest egg resides in IRA accounts, for example, they’ll have significant required minimum distributions subject to income taxes. 

One solution to this issue is using partial Roth conversions to reduce their lifetime tax liability. By converting a portion of their IRAs and paying taxes on the transaction today, the converted dollars continue to grow tax-free and can be withdrawn tax-free in retirement, both of which help reduce their tax liabilities in retirement.


4. Encourage Employees To Maximize Their 401(k) 

Every year, the IRS determines the maximum contribution limits for IRAs and 401(k)s. In 2022, the maximum contribution for 401(k)s is $20,500 ($27,000 for individuals 50 or older). Employees should take advantage of these new, higher limits to reap the rewards of compounding interest later. 

At the very least, encourage your employees to contribute enough to maximize any employer match. Failing to get an employer match is like leaving free money on the table. Plus, it’s the only place you can earn an immediate 100% return on your savings.


5. Help Employees Reduce Debt 

In 2016, the median debt of households headed by someone 65 or older was more than twice the total it was in 2001. To avoid debt in retirement, employees should begin paying it off now, starting with high-interest debt, like credit card balances and personal loans. 

To help employees manage debt, some employers have implemented emergency savings accounts, student loan repayment plans, and debt consolidation programs. 


6. Offer a Health Savings Account (HSA) 

According to Fidelity Investments, the average 65-year-old couple will spend about $11,700 on healthcare in the first year of retirement. While Medicare kicks in at age 65, it often doesn’t cover everything. 

Offering employees an option to contribute to a health savings account (HSA) through a high deductible health plan can provide unique opportunities to cover healthcare costs in retirement. HSAs are the only retirement savings vehicle that have a triple-tax benefit: contributions are tax-deductible, earnings and income on contributions grow tax-free, and there are no taxes on withdrawals for qualified medical expenses. 


7. Provide Access to A Professional

Perhaps the most important step an employee can take before their retirement is meeting with a financial planner. A financial planner can help the employee develop a realistic retirement plan personalized to their needs, taking into account all of the above guidelines. Ultimately, a financial planner can ease employees’ burden and assuage their worries, ensuring they have the best plan to live out their dream retirement. 

Employers can play a critical role in helping employees prepare for retirement. Helping employees put a solid strategy in place today will allow them to embrace their pending retirement with confidence and focus on being the best version of themselves in the present.  


Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.