Financial Wellness

Closing Retirement Savings Gaps with the Help of Financial Wellness

Financial success, long-term but also day-to-day, is at the heart of financial wellness. Here’s how to encourage and support it.

Key Insights

  • Workers save for retirement throughout their careers, but it isn’t the only financial demand they face.
  • Many struggle to keep longer-term goals on track in the face of more immediate, competing priorities (like bills).
  • There’s a lot that plan sponsors can do to address this within their plans.

There’s no doubt that saving for retirement is a challenge for American workers. A big challenge: the Employee Benefit Research Institute (EBRI) estimates that Americans’ combined retirement savings shortfall is an astounding $4 trillion.

There are many reasons for this gap, and plan sponsors can help their clients address one of the biggest: the challenge to connect everyday financial choices with the need to save for a secure retirement. Without this connection—without the ability to stay focused on making sound financial decisions today to achieve their longer-term goals—many workers find themselves with their own retirement savings shortfall. And it can lead to a crisis of confidence shortly before they begin their retirement.

One way to help clients avoid this problem is to keep a tight focus on making the right financial decisions today. While this may sound simple, it’s something many people struggle to do.

Americans face an almost $4 trillion retirement savings shortfall, according to estimates by The Employee Benefit Research Institute

Financial Wellness: One Life Stage at a Time

Being fully prepared for retirement is just one aspect of financial wellness. And because its meaning can change with each life stage, financial wellness can be a hard concept to communicate.

While workers save for retirement throughout their careers, retirement isn’t the only financial goal they have. The 401(k) participants surveyed in a recent T. Rowe Price study also listed repaying student loans, starting a family, purchasing a home, and saving for a child’s education as important financial milestones. 

Financial Wellness Amid Changing Priorities

Throughout a saver's working life, many of their expenses will shift. But other long-term goals, like retirement, remain constant.

Financial Wellness Amid Changing Priorities

Source: T. Rowe Price.

Hypothetical timeline of debt repayment and savings goals.

One big challenge for savers can be the timing of those goals. Starting a family and buying a home, while paying off student loans and supporting an aging parent can be more than many people can afford. Which can make focusing on retirement doubly difficult.

That’s one reason that 29% of the participants said they weren’t saving enough for retirement. Moreover, of people who knew they weren’t saving adequately, more than half said they were already saving all they could afford. So financial wellness often comes down to balancing the pressing demands of today with longer-term goals like retirement. 

Beware: Confidence Drops, Even Among Savvy Investors

You might expect that investors with more experience, more financial savvy and more money to invest would be more confident about their retirement. But surprisingly, the opposite is true of people nearing retirement. Instead, as they begin to calculate their savings and plan for life after work, they experience a drop in confidence, according to a recent survey.

As Retirement Nears, Confidence Declines

Despite their progress toward their goals, and healthy financial behaviors, people lose confidence as retirement comes closer to being a reality.

As Retirement Nears, Confidence Declines

Not to scale. For illustrative purposes only.

Source: T. Rowe Price 2020 Retirement Savings and Spending Study.

This disconnect is especially pronounced among investors with strong financial wellness scores—people who have more substantial retirement savings, own their homes and effectively manage their debt. One major reason they feel less confident is that they have less time to save, and the amount they have in their retirement accounts is closer to the final amount they’ll have to live on after they stop working.

How to Boost Both Financial Wellness and Confidence

There are ways plan sponsors can cultivate better financial wellness at all stages of their participants’ lives, and boost their confidence as they near retirement.

How to Boost Both Financial Wellness and Confidence

Supporting Better Choices

Financial wellness is a lifelong process. There will always be pressing, near-term financial needs. But with the right education and support, savers can balance those imperatives with long-term goals, such as retirement.

As a major source of information and actionable support for long-term goals, plan sponsors play an important role in fostering financial wellness. As a partner with plan participants, sponsors can help them forge a strong connection between today’s actions and tomorrow’s outcomes.

Get More Information

There’s much more ground to cover with respect to this insight. Dive deeper with the full white paper, which provides even more research and analysis on optimizing outcomes for retirement savers.

Important Information

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.

The views contained herein are those of the authors as of August 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

All investments involve risk. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., distributor, and T. Rowe Price Associates, Inc., investment advisor.

©2021 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.


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