Why Americans are unprepared for retirement

4 reasons Americans are unprepared for retirement

August 1, 2023 11:39 AM

From middle-age caregivers to recent graduates, the idea of reaching retirement — and being prepared for it — is stressing out just about every demographic of the workforce. Despite their different life stages, the one thing they have in common is a desire for additional support.

Whether through programs to help employees pay off student loans (without sacrificing their retirement efforts) or making financial education a core part of a company's culture, there are a number of proven ways employers can go about helping their workforce prepare for the future.

A survey by financial resource Value Penguin revealed that 63% of employees don't understand how 401(k)s work. This may be why Morgan Stanley at Work's annual State of the Workplace report found that 92% of employees prioritize retirement planning assistance when considering where to work.

"Many employees are probably still developing a baseline understanding of how to invest in general — many of these employees haven't gone through financial literacy education in high school or any type of finance training or learning," says Craig Rubino, head of participant insights, financial wellness and learning at Morgan Stanley at Work. "Employees need to understand the trade-offs. Any actions they're taking today will have significant consequences on their nest egg down the road."

Check out why employees are struggling to prepare for retirement — and how organizations can help them feel more confident in their future.

Employees are making hasty decisions — and it's costing them

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The new urgency for mitigating 401(k) account cash-outs

A robust job market means more job switching — which can be bad for retirement savings. The research report Cashing Out Retirement Savings at Job Separation, released in April by the Sauder School of Business at the University of British Columbia (UBC), reviewed data for 162,360 U.S. workers who left jobs at 28 U.S. companies, and found that 41.4% of those employees chose to prematurely cash out savings from their 401(k) accounts when they left their employers.

"Lack of retirement preparedness has long been an area of concern for our nation," Spencer Williams, CEO of Portability Services Network and Retirement Clearinghouse, writes in a recent op-ed for EBN. "Despite all of the media coverage offering tips for how to save more for retirement, many Americans are still making a self-destructive decision that can leave them with less when they retire."

Caregiving responsibilities are getting in the way

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Caregivers are unprepared for the reality of retirement

For caregivers, retirement isn't always within reach. According to the Employee Benefit Research Institute's recent Retirement Confidence Survey, a third of caregivers who are now retired say that their lifestyle in retirement is worse than what they expected, compared with 20% of retirees who do not have caregiving responsibilities.

"Caregivers may have to reduce work or quit work entirely in order to provide care. If this happens, the caregiver will have less financial resources to support themselves," Craig Copeland, director of wealth benefits research at EBRI, recently told EBN. "If caregivers can't support themselves, they may not be able to provide additional support for those receiving care, and both the caregiver and the recipient will face significant challenges."

Student loans are making retirement feel out of reach

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Schwab and Vault help employees juggle retirement savings and student debt

Student loan debt is crippling borrowers across the country, and as federal relief now feels out of reach for most, employees are now relying on employers for help managing debt. Schwab has teamed up with Vault, a student loan benefit provider, to launch a partnership that will help the financial service company's 401(k) plan participants strategize the best way to pay off their loans.

"We know if people aren't sure what the right decision is, they don't take any action. It's just about having that discussion, talking through their concerns and talking through what options they have, so we can best educate them," says Adrian Miguel, director of advice at Schwab Retirement Plan Services. "Ultimately, we want to help them take positive action and positive steps towards what changes they can make to really set them up for success."

Not enough employees have access to the financial education they need

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Financial education can help employees keep their retirement savings intact

Lack of financial education is hurting employees' long-term financial security. In fact, Morgan Stanley at Work's annual State of the Workplace report revealed that 66% of employees say financial stress is impacting their work and personal life, and 66% of all employees have scaled back on their retirement contributions because of inflation and concerns around a recession.

"We recommend that employers play a big role in this process through education," Rubino says. "Providing things like webinars, workshops, access to one-on-one coaching and financial advisers can help employees make smart decisions around their finances, especially around their retirement plan."