The concept of retirement savings has changed rapidly over the past two decades. The classic “three-legged stool” concept — in which individuals rely equally on Social Security, their company pension, and their savings for their retirement nest egg — no longer rings true for most Americans. Retirement incomes of the future will more likely resemble a pedestal table, with one’s personal savings providing primary support and Social Security or employer-supplied plans acting as stabilizers.
As hard as many people have worked to stash money for the future, many still haven’t done the math to understand whether they’re doing enough. A recent study found that nearly 50 percent of Americans say calculating their retirement number is not easy and that they would not know where to begin.
This brings up a question: Who makes up this 50 percent? Intuitively, you might guess that the higher people’s income rises, the more likely it is they have a sound, well-calculated retirement strategy. But, experienced agents know that’s not necessarily true. Many people with higher net incomes have non-workplace investments upon which they rely for long-term income, but they have never actually nailed down “their number” with any certainty.
In truth, when agents help executives with this important calculation, chances are they discover a gap between the executives’ envisioned retirement lifestyle and the actual financial infrastructure necessary to support it. This is because the retirement savings playing field is tilted against high-income individuals because of IRS limits on their ability to contribute to qualified workplace savings plans.
Qualified retirement plans still offer the best savings opportunity for retirement — contributions are not taxed to employees until withdrawn from the plan, and employer contributions are tax deductible. But there is a limit to how much a participant can contribute to a qualified plan: $15,500 annually for 401(k), 403(b), and 457(b) plans.
This limitation effectively puts highly paid executives at a disadvantage. So, those who participate in a 401(k), 403(b) or 457(b) plan fail to receive the same ratio of before-to-after retirement income as the average worker enjoys. For example, an employee making $50,000 a year can contribute more than 30 percent of their income to a 401(k), 403(b), or 457(b) plan, whereas an executive making $200,000 can contribute only 7.75 percent of their income.