Flexible retirement savings plans and employer matching can potentially provide lower-income workers with earlier retirement options despite the rising cost of living, according to a new report by Mercer.
The report analyzed two scenarios for workers earning $50,000 with workplace retirement plans that include employer matching.
Read: Employer matching key to supporting young workers’ retirement readiness: report
In the first scenario, the worker neglects to contribute to their plan early on in their career to direct money to other priorities, such as paying rent, meeting daily necessities or making a down payment on a house. Because they didn’t contribute, their employer can’t match their contribution, potentially leading to no long-term savings until their financial position improves.
In the second scenario, the worker takes advantage of a flexible employer-sponsored retirement plan, where both the employer and employee contribute five per cent of the employee’s salary to the employee’s retirement plan.
Due to the flexible nature of the plan, the employee in the second scenario can withdraw the money they contributed for immediate needs and savings goals. The employee is ultimately able to save five per cent per year through ongoing employer matching until they’re in a better financial position, at which point the employee can begin contributing the five per cent to the savings plan without withdrawing, bringing their total savings level to 10 per cent.
Read: 47% of U.S. millennials are moderately confident they’ll save enough for retirement: survey
In the first scenario, where the worker saves nothing before age 45, retirement readiness arrives at age 69. In the second scenario, with a flexible plan, readiness comes two years earlier, at age 67.
“In tough times, it’s no surprise that people are likely to prioritize immediate needs over their future need to retire,” said Bernadette Chik, defined contribution and financial wellness leader at Mercer, in a press release.
“Organizations that understand this and introduce flexible savings options will increase the perceived value of their savings plans among employees and may enhance their workforce’s readiness for retirement and overall financial well-being. Furthermore, when senior employees are in a strong financial position to retire, it creates opportunities for emerging talent and fosters leadership development.”