Helping Clients Develop a Healthy Approach to Retirement Savings
By Jodie Norquist, CIP, CHSP
The past few years have been a roller coaster ride for many retirement savers. After performing well for several years, the broader investment markets have been hit hard since the beginning of 2022. Now the price of gas, food, housing, and other goods and services continue to rise, and for many of us, something needs to give.
But that “something” shouldn’t be your retirement savings.
Still, many Americans have been hit hard in the pocketbook by the pandemic and other economic stressors. Financial insecurities have led to decisions to take plan loans or IRA distributions, with some reducing or stopping contributions to retirement savings altogether. Others are considering delays in retirement—or even abandoning their hope of retirement altogether. These conditions may also lead your clients to ask for savings withdrawals.
The 2022 T. Rowe Price’s Retirement Savings and Spending Study, an annual study conducted since 2014, reported the following pandemic effects on retirement in 2020.
39 percent of defined contribution plan participants surveyed reported reduced pay during 2020.
18 percent of participants surveyed reported reducing their retirement contributions during 2020.
10 percent of plans reduced or suspended employer contributions in 2020.
23 percent of participants surveyed dipped into retirement funds to compensate for COVID-19 pandemic effects.
9 percent of participants took advantage of at least one CARES Act provision (e.g., enhanced retirement plan loan, coronavirus-related distribution (CRD)).
Less than 1 percent repaid a CRD by the end of 2020 (recipients have three years to repay CRDs).
Most who withdrew retirement funds during the pandemic were between the ages of 40 and 50.
Another study reported that the average personal savings amount dropped 15 percent from $73,100 in 2021 to $62,086 in 2022. There is a bright side, however: of those respondents, 60 percent said that the pandemic has encouraged them to build up their personal savings; 10 percent said they’ve rebounded financially and now are ahead of where they were pre-pandemic; 12 percent said they are fully back on track.
Help Your Clients Get Back on Track
So how can you—without giving investment advice—help your clients reset their retirement goals? Here are some ways to encourage them to think about their short-term and long-term savings goals and the products you may offer that would help.
Don’t Pass Up Free Money. Even if your clients can’t invest the maximum allowed into their qualified retirement accounts, encourage them to save at least enough in their 401(k) or other employer-sponsored retirement plans to qualify for any employer matching contributions.
Invest in a Roth IRA. Many of your clients may be struggling to build their emergency savings. A Roth IRA can help. While it certainly may be used as a tax-free investment vehicle to save for retirement, it can also be drawn upon for unexpected expenses. Based on the consumer-friendly Roth IRA ordering rules, your clients may be able to withdraw their contributions tax and penalty free. As a rule, you probably don’t want to encourage clients to deplete their retirement savings. But they may feel comfortable contributing even more if they know that they can tap into their Roth IRA if needed.
Invest in an HSA. Health savings accounts, or HSAs, offer many tax advantages. In fact, some financial advisors are even recommending that their clients contribute their maximum annual HSA limit before they contribute to a Traditional or Roth IRA.
Here’s why: HSAs have a triple tax advantage, have no required minimum distributions at age 72 , and allow HSA distributions without a triggering event (a penalty may apply if assets are not used to pay medical expenses). Unfortunately, not everyone is eligible to open an HSA.
Don’t Forget About Old 401(k) Plans. Clients who have changed jobs during their career may have forgotten about retirement savings plans with a former employer. Now might be a good time to consider rolling over those plan assets into an IRA. Although some 401(k) plans may offer more investment choices or lower fees compared to an IRA, consolidating employer-plan assets into an IRA may offer cost savings or other flexibility.
Build an Emergency Savings. An emergency savings fund can keep your clients afloat in challenging financial times. Instead of relying on credit cards, loans, or retirement savings distributions, they can access their emergency savings and potentially avoid raiding their retirement assets or borrowing money. Even a small fund is better than no fund at all, and your clients can work their way up to a larger stash of cash over time. Setting up an automatic monthly deposit or arranging to have their tax refunds directly transferred into an emergency fund can help create an annual emergency savings boost.
If we’ve learned anything since 2020, it is this: expect the unexpected. A financial cushion can help weather any storm and allows your clients to keep aiming toward their long-term financial goals. And for IRA administrators, that’s not only good customer service, but good business.
