People want to reduce their financial stress, but they need help
In our seventh annual financial stress survey,1 our participants told us what they think would help reduce their financial stress. They said:
- Setting aside enough money to cover basic retirement expenses
- Paying down debt
- Having an emergency savings account
- Setting financial goals
- Having their employer automatically increase contributions to their retirement plan
- Making a budget
Although some people may be able to work on all six items at the same time, most will need help prioritizing. Our six ways to reduce financial stress rearrange those priorities a bit to help your participants establish a solid foundation to build on as they work their way up to a retirement they can enjoy.
1 Create a budget
In our survey, 62% of participants said making a budget would help them reduce their financial stress.1 Without a budget, it’s hard to know how much to spend on a birthday gift, pay on a credit card bill, or save for retirement. So, the first step in reducing financial stress is to create—and follow—a budget. There are lots of personal financial tools online (and your recordkeeper may even offer one) that can help people link all their asset and liability accounts for a full view of their finances. You can help them break down their expenses into essentials and nonessentials, set up their budget, and show them how to track their spending.
2 Set financial goals
Once people see a picture of their current finances in their budget, they can start to establish financial goals. And yet, many people don’t take the time for this step—as 40% of participants said that setting financial goals would help them reduce their financial concern.1
Besides retirement, what are their long-term goals? Buying a house or saving for their kids’ education? What are their mid-term goals? Paying off student loans? And how about short-term goals, such as buying a car, going on vacation, or paying off credit cards? Help people set and prioritize realistic goals.
Student loan debt is keeping people from being able to save for retirement, save for emergencies, and purchase a house
3 Save for retirement
As you know, time is a critical factor in building retirement savings—so encourage people to start saving as soon as possible, even if they start small. Demonstrate the wonders of compounding and the long-term value of time. Once they’re saving, help them save more by making sure they meet the employer match. Suggest contributing an additional 1% every time they get a raise or promotion—even better if they can enroll in automatic increase. The critical point is to make sure everyone, even people in their 20s, understand the need to start saving for retirement.
4 Pay down debt
People with major debt experience the highest amount of financial stress.1 Debt comes in many flavors, some bad—e.g., rolling credit card debt—and others not so bad—e.g., a mortgage. Make sure participants understand the different kinds of debt, as well as the interest rates and fees associated with them, and share some best practices for using credit cards. For people whose credit card or student loans are overwhelming, help them prioritize paying down their high-interest debt first.
5 Make saving automatic
Borrow the concept of auto and use it for other savings goals. Emergency savings is an important place to start, as 57% of participants say they’re stressed by not having enough saved for emergencies.1 There are plenty of ways to make it automatic, such as divvying up their paycheck for different accounts through direct deposit or setting up automatic transfers to a savings account.
Automatic saving can also help people achieve the other goals they set in step one, by setting up accounts for a new car, a vacation, a boat—whatever they want.
6 Optimize a 401(k)
Once you have people saving in their plan, you can start encouraging them to make the most of it. For example, about 80% of participants don’t know whether they’re on track for retirement.1 So, make sure they know how to use any planning and tracking tools on their retirement plan website or help them learn how to track their progress on their own.
In addition, 57% of participants don’t consider themselves knowledgeable about investments1—so be sure to include education about investment basics and handling market volatility.
Here’s a checklist that can help participants maximize their 401(k):
- Meet the match.
- Choose automatic increase, if it’s available.
- Make sure the investment strategy is aligned with the goals.
- If Roth 401(k) is available, would after tax be better than pretax contributions?
- Consider automatic rebalancing.
- Consider a managed account.
- Use the retirement plan website tools to model savings and income scenarios.
- Estimate healthcare spending needs, reassess the overall savings goal, and consider a healthcare savings account.
- For people over age 50, consider making catch-up contributions.
- For people over age 50, start planning for retirement income and work on a drawdown strategy.
Mastering the fundamentals to reduce financial stress
No matter what the economy is doing, the fundamentals of personal finance don’t change. As Michael Jordan said, “Get the fundamentals down, and the level of everything you do will rise.” When you meet with participants, these six steps can help you get them to focus on the fundamentals to reduce their financial stress and ultimately, help them to save for the retirement they want.
This piece is intended for a financial professional audience.
1 In July 2020, John Hancock commissioned our seventh annual financial stress survey with the respected research firm Greenwald & Associates. An online survey of 589 workers was conducted between 7/28/20 and 8/14/20 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Greenwald & Associates are not affiliated, and neither is responsible for the liabilities of the other.
This report presents the results of research conducted by Greenwald & Associates on behalf of John Hancock. The objectives of this study were to i) quantify the financial situation and level of financial stress of John Hancock plan participants, ii) determine the key triggers of financial stress, iii) understand the extent to which actions, including actual financial behavior and planning activity, ameliorate stress, and iv) assess retirement preparation and readiness. The average survey length was approximately 19 minutes per respondent. Respondents were located from a list of eligible plan participants provided by John Hancock. All statistical testing is done at .95 and .99 significance levels. The maximum margin of sampling error at the 95% confidence level is ± 4.1%.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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