While it likely comes as no surprise that health care costs are rising and becoming a growing concern for most Americans, what may be surprising is the lack of focus on the potential future impact of these rising costs for employees. It's an impact that should be considered as part of retirement planning. Employee Benefit News reports that for a 45-year-old couple, projected lifetime health care expenses are likely to far surpass the Social Security benefits they will receive.
Why Might Social Security Fall Short?
According to Rick Bender, a financial adviser with Savant Capital Management in Rockford, Illinois, one of the key impacts on whether Social Security will fall short is when individuals choose to file for benefits. "If an individual files for benefits as soon as they are eligible, they reduce their Social Security benefit by 20 percent," according to Bender. "For those who were born after 1960, the benefit would be reduced by 30 percent," he says.
In addition, Bender points out that health care inflation is outpacing the growth of Social Security. "The earlier people realize the power of compounding interest, the better off they will be," he says. "Investing early, often and consistently allows for greater opportunities and solutions in the future."
Another key is early and consistent contributions to retirement benefit plans — something younger employees may fail to consider, and older employees struggle to catch up on. But organizations can play an important role here.
How You Can Help Employees
Organizations can play an important role in informing and educating employees about making sound financial decisions. It's an ongoing process, and should take into account the various life stages employees are at — and how their needs will change as they age. "Retirement planning is an ongoing process and consists of an accumulation phase and a distribution phase," says Bender. "As people go through both phases, contribution limits, rules and tax brackets may change."
Finance leaders certainly can't, and shouldn't, shoulder the responsibility for retirement planning education alone. They can call on the assistance and expertise of internal resources such as their HR colleagues, and external resources like independent advisers.
Helping employees understand how much they're going to possibly need in retirement for health care is also important, says Timothy Yee, president of Green Retirement, Inc., in Alameda, California. "Showing them what they will need and then helping them chart a path to that goal is key as well," he says.
3 Communication Best Practices
Issues and considerations related to retirement and health care coverage are complex and vary greatly based on employees' ages and personal situations. Yee recommends that communication be "in simple, easy-to-understand language." For instance, consider modeling different contribution rates at different salary levels to help employees understand the impact on their paychecks. One-on-one and group meetings are best practices here, Yee notes. "Many employees don't take action until the paperwork is thrust in front of them," he says.
Finance leaders should involve plan advisers in the education process. It's also important to ensure that employees understand the importance of starting contributions early and the consequences of taking funds out of their accounts. "Too many people I've met cash out a retirement plan when they change jobs," Yee says.
Building in some "force functions" can also be a good way to help boost the odds that employees are well-prepared for retirement and future health care needs. "Autoenrollment and autoescalation are two easy steps an organization can take to try to ensure employees are prepared financially for retirement," Yee says.
The right combination of ongoing communication and automation can help ensure that employees reap the rewards of their working years when it matters most.
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