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September 05, 2013 at 08:10 AM
There’s been a lot of chatter about retirement readiness. I like it. I’ve been measuring it for more than a decade now. It’s the key metric for anyone interested in retiring in comfort. Granted, there’s still a little subjectivity in it (e.g., how much of your pre-retirement salary do you need when you retire), but it’s a process that generates an honest, measurable and (hopefully) attainable goal-oriented target that’s on the right track.
But let’s agree on one thing: Only people can be retirement ready. It’s meaningless to say a plan is retirement ready.
We’ve all seen it. There’s a trend out there. People of all sorts – vendors, plan sponsors and even reporters – are trying to determine the best measure of retirement readiness. The best of these ideas focuses on accumulating each individual measure of every participant in a plan to gauge how effective the plan has become to encourage employees to become retirement ready (see “Retirement Readiness: The One True 401(k) Benchmark Every Fiduciary Should Measure,” FiduciaryNews.com, Sept. 4, 2013). They’re identifying the key components needed to determine if and when an employee is retirement ready.
See also: IRI survey points up discrepancy between actual and expected retirement ages
Unfortunately, some have broken down these components even further and suggest applying them to the plan as a whole, not within the context of the individual employee. Mind you, there’s a good reason to try this. Plan level data is much easier to compile and track than participant level data. There’s only one slight problem – what tells you something of significance to an individual may not tell you something significant when analyzing the same statistics at the plan level.
Here’s a crude example. Let’s say we’re looking at plan-level data and we discover the average plan participant has 30 years to go before retirement, earns $40,000 and is saving a healthy $8,000 per year (after company match). That’s a savings rate of 20 percent per year. These statistics suggest, over a 30-year time period, there’s a real good chance the average employee will be retirement ready.
