Using short-term savings goals as a baby step into retirement readiness may not be for everyone, but it can certainly help employees who need financial guidance, as well as those who do better with deadlines, tangible goals, or accountability.
As the saying goes, you can lead a horse to water but you can’t make it drink. Even if employers offer 401(k) plans, contribution matching, or HSAs/FSAs, some employees may choose not to take advantage of these benefits and may not realize what they’re missing out on. However, there’s a less direct approach that can help employees learn to save for retirement: planning big purchases.
When it comes to significant expenditures like buying furniture, replacing a car, a much-needed vacation, or even purchasing holiday presents, employees may have to learn to budget, save, consider financing options, or utilize tools like placing items on layaway. This is a golden opportunity that employers can use to help their employees build their financial wellness toolkit so that the same skills can be applied to retirement savings.
For example, budgeting is a core tenant of financial planning and helping employees find more money to invest, but as we’ve discussed before, it’s a widely underutilized tool. Though it’s one of the first steps in retirement savings, many people are averse to the process. It makes sense; many haven’t learned how to create a budget in school or other formal setting and budgeting, especially when it comes to retirement savings, is a textbook-ready definition of delayed gratification. More likely than not, the budget-er may discover that they’ll have to make immediate sacrifices for long-term gain; not a particularly pleasant reality for most people despite the significant benefits. However, when it comes to large purchases that still qualify as personal spending, the finish line is both tangible and in sight. Rather than aiming for the nebulous idea of a comfortable retirement and whatever that looks like to each individual, it’s a couch, a car, a trip to Greece, or a bicycle for their daughter’s birthday in two months. Having something solid to focus on as well as a shorter timeline can be the foot in the door that employees need in order to get their retirement savings ball rolling.
So how exactly should plan sponsors go about utilizing these opportunities? There are several options, and a lot of room to get creative. Offering seminars, webinars, or even starting with worksheets on short-term savings can be an excellent starting point. When it comes to saving for holiday presents, timing these for the fall (before Black Friday and the Christmas retail rush) and tailoring content to gift-giving with an overview on limiting spending, payment plan pros and cons, and layaway (in addition to budgeting) can be a timely way to garner interest. Similarly, many large purchases are seasonal like wedding season or home-buying season, and can be planned for 6-12 months in advance, so seminars for topics on a rolling deadline like car purchases and furniture can be offered on a regular basis.
From there, step two in this two (or three, or more) part series might be a bridge from short- to long-term savings that tie specifically into retirement once these employees are in the door and have a taste of success. After all, if they found a way to put away an extra $30 a week for six weeks, is that a tenable option indefinitely, knowing the long-term benefits? If not, what is? Can they do $20? Using short-term savings goals as a baby step into retirement readiness may not be for everyone, but it can certainly help employees who need financial guidance, as well as those who do better with deadlines, tangible goals, or accountability. If nothing else, these exercises in economic education can help employees get that couch, car, gift, or make that other large purchase they wanted without breaking the bank, plus build their foundation of financial knowledge upon which better decisions can be made whenever they may be ready in the future.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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