Our world was turned upside down over the last few months as the coronavirus (COVID-19) spread across the globe. Throughout this pandemic, U.S. and international markets became increasingly volatile, businesses across the country were forced to shutter their doors for months at a time and the small business community was hit particularly hard.
That said, there is a light at the end of the tunnel. The U.S. economy is slowly starting to reopen, which should create opportunities for individuals and businesses to recover.
While we are optimistic about the future, we shouldn’t forget the past. This is not the first major economic challenge or market downturn our country has faced, and it won’t be the last. None of us want to experience the fear, uncertainty or pain of not being financially prepared to get through the next crisis, especially as we enter our retirement years.
So, how do we face the future with confidence, no matter what it might hold? To answer that, we first need to explore the forces at work in the retirement industry today.
When we look across the retirement landscape, there are three key themes dominating conversations today.
- The disappearing three-legged stool. Historically, individuals have had three main vehicles available for their retirement needs: Pensions, Social Security and personal savings. However, this model is no longer sustainable — company pensions are nearly extinct, public pensions are woefully underfunded and Social Security is projected to have a 20% or greater reduction in benefits by 2034 if no changes are made today. That means the responsibility for establishing a secure retirement now falls squarely on the individual, through the use of a 401(k) and other retirement savings plans. With life expectancy increasing globally, stashing away enough money to live comfortably in retirement for 10 to 20-plus years has become a significantly bigger burden.
- The rollout of state-mandated retirement plans. In the last decade, we have seen the rise of state-mandated retirement programs. These are designed to encourage businesses to enroll more employees in long-term retirement plans and help combat the looming retirement crisis described above. Essentially, employers in participating states are required to either enroll in the state-sponsored program (in most cases, a payroll-deduct Roth IRA) or work with a private provider. California, Illinois, Connecticut, Oregon and Maryland have been leading the charge in enacting these measures, with several other states considering legislation. If you operate a business in one of these states, make sure you carefully consider the benefits of working with a private provider before opting for the state option, and ensure you are taking the necessary steps to comply with enrollment deadlines. If you do not live in a state with a mandated retirement program, there are still many benefits to offering a retirement plan for you and your employees that should be carefully considered.
- The passage of the SECURE Act. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019, is one of the biggest pieces of retirement legislation enacted in over a decade. It includes several significant incentives for small businesses, such as tax credits up to $5,000 for starting a retirement plan and offering automatic enrollment. It also introduces new retirement benefits for individual savers, including raising the required minimum distribution age for retirement accounts to 72 (from 70½) and allowing long-term, part-time workers to participate in 401(k) plans. This act is a huge step in the right direction to encourage businesses and individuals alike to take control of their financial futures.
Ensuring financial security after the events we recently faced as a country is going to take the perfect storm of governmental support, institutional changes and societal shifts. That said, it’s possible if we work together and use this experience as a wake-up call to focus on the future.
Retirement of the future
The recent pandemic and resulting market downturn shined a spotlight on the reality of retirement savings in America, magnifying the importance of preparing for short-term needs without sacrificing long-term goals.
The new approach to saving for retirement may be moving away from a singular approach and toward a dual-savings strategy.
This would generally start by making savings the number-one line item in a budget. Many people don’t have even a simple budget in place, and those who do often have it backward. They pay their bills, book travel plans or nights out with friends and then, if they have anything left over, contribute to their retirement savings. It may be time to start seriously thinking about reversing this strategy and paying yourself first.
A dual-savings strategy may be completed by bifurcating savings into the following vehicles:
- Short-term savings account or “emergency fund.” This acts as the necessary “padding” to accommodate any unexpected costs or life events (e.g., losing a job, medical expenses, car or home repairs, etc.). The goal for this account would be around six months’ worth of typical monthly expenses. Don’t worry if you’re not close to that target right now. Every little bit counts and will make a huge difference when it matters most. Generally, an emergency fund, would contain 80% of budgeted savings each month until that goal is reached.
- Long-term retirement savings plan. This would be a 401(k) or similar qualified retirement account. Generally, the other 20% of allotted monthly savings would go here while you are still contributing to an emergency fund — and then 100% of savings would eventually go to retirement once the emergency fund goal is met. A long-term retirement plan is similar to a one-way street: Money is put in and not taken out until its needed in retirement. That’s the beauty of having a short-term savings account in place to fund any immediate expenses.
Saving for retirement while simultaneously managing other financial responsibilities is a challenge we all must face. This dual-savings strategy allows both goals to be achieved: preparing for the unexpected while still investing in the future.
This is the beginning of a tectonic shift in retirement savings. Many people envision retirement as endless vacations or carefree spending, but that’s not the reality of our world today. Retirement is essentially permanent unemployment and it is solely up to the individual saver — not the government or employers — to ensure financial security when leaving the workforce. But the good news is, no one has to go it alone.
Ubiquity is here to help
At Ubiquity Retirement + Savings, we are committed to staying true to our name and supporting the retirement savings needs of the small business community.
There is no doubt we will face challenges along the road. But we have weathered many storms in the past — from 9/11, to the financial crisis of 2008-2009, to the recent coronavirus pandemic — and have always bounced back stronger because of our ability to adapt.
Rest assured, we are not sitting idly by as the world changes around us. We are taking our 20-plus years of experience, our proprietary technology and our entrepreneurial spirit and adjusting our retirement solutions and service offerings to better serve you and your employees.
While we cannot predict what the future has in store, we will face it together head-on, armed with all the tools you’ll need to build the retirement that’s right for you.