By Alan Gross
George Harrison sang, “If you don’t know where you’re going, any road will take you there.”
The idea for this refrain is attributed to a chat between Alice and the Cheshire Cat in Lewis Carroll’s “Alice’s Adventures in Wonderland.”1 If you don’t have a direction or a goal, how can you arrive at your destination? Yet, when it comes to saving for retirement, that’s exactly what millions of people are doing. They are invited to participate in their company’s 401(k), 403(b) or other plan, contribute some percentage of payroll, and select from a range of investments. Typically, they’re offered no means of determining an appropriate savings goal. What’s their retirement income goal? Their retirement funding goal? They have no idea. As an industry, we’re not doing enough to help them answer the most fundamental and important questions. And as a result, it’s likely they won’t get “there.”
Most people simply don’t know how much they will need in retirement income.
Defined contribution plan designs have, by definition, never concerned themselves with a quantifiable destination such as a fully funded retirement. Contributions and earnings over time sum to an “accumulated balance” that, while helpful, is not clearly connected to the primary goal. The problem is that most people simply don’t know how much they will need in retirement income. As such, they don’t have any idea if they are accumulating enough or saving at an adequate rate to be successful.
“Accumulated balance,” while helpful, is not clearly connected to the primary goal.
Know your goal!
How do you estimate the retirement funding goal for each person? There are many ways to extrapolate present income and expenses and estimate need in the future. A simple calculator considers the person’s age, desired retirement age, income, savings, and savings rate. A more evolved calculator also considers gender (mortality), destination in retirement (local and state taxes), outside savings, and spousal savings. The fintech answer is to leverage data to create a robust calculation based on dozens of data points rather than depending on participants to provide what is often basic and incomplete information. The result can provide a clearer, more actionable, and much more personal projection that can be delivered at scale.
It’s reasonable to believe that the more personally relevant information is, the more likely investors will own it and act on it. If you know your goal, you know where you stand—and more importantly—where you’re going. If you don’t, any road will take you there.