Because many employers are unaware of the cost of having older workers unable to retire, or think they cannot calculate it, Prudential Financial has done the analysis and published its findings in the report, “Why Employers Should Care About the Cost of Delayed Retirements.”
For each individual who cannot retire, the cost averages an extra $50,000 a year, representing the difference between the salary of an older worker and hiring a younger person, according to Prudential. The annual cost across a workforce is an additional 1.0% to 1.5% a year.
For example, consider a company with 3,000 employees and workforce costs of $200 million. A one-year delay in the average retirement age would cost the firm between $2 million and $3 million. A two-year delay would average an additional 2.2% in workforce costs, and a three-year delay, 3%. In addition, health care costs for a 65-year-old are twice that of a worker between the ages of 45 and 54, Prudential says.
Furthermore, the real cost is actually higher, according to Prudential, “because qualitative costs of delayed retirements, such as the impact on productivity and on promotion and advancement opportunities in the workforce, are not considered.”
Prudential also reports that in 2014, the average American retired at age 62, up from 60 in 2012, and that is likely to increase, as 59% of Boomers plan to retire at age 65 or older, and 26% plan to retire at age 70 or older.
Employers are increasingly aware of this risk, Prudential found; 57% of finance executives said they think a significant proportion of their workforce will delay retirement because of inadequate savings. Indeed, 22% of Boomers have no retirement savings, and 40% have balances of less than $100,000.
Prudential says employers can mitigate this risk by adopting automatic enrollment, automatic escalation and company matching formulas that encourage higher savings. The investment firm also recommends the use of target-date funds as the qualified default investment alternative (QDIA) and financial wellness programs, so that workers can get their financial houses in order so that they are able to save for retirement.
Finally, Prudential says that incorporating guaranteed lifetime income products into a defined contribution plan can reduce the amount a 65-year-old person retiring would need by 36%. Prudential’s report can be downloaded here.