Retirement is not what it used to be and that is mostly a good thing. Mostly.
The great news is that people are generally living much longer in retirement than was once the case. For example, when social security was introduced in 1935 as a part of President Franklin Delano Roosevelt’s “New Deal” the official retirement age was 65. Average life expectancy, however, was only 62!
Moreover, there were 42 workers paying into the system for every 1 receiving benefits. So, when Social Security was first installed, its continued solvency seemed a sure bet.
Fast forward 90 years and things look very different. Today, people are often living well into their eighties, and it is no longer uncommon for folks to live into their nineties. Also, there are now only three workers paying into social security for every one that is receiving benefits. That ratio is expected to narrow to two to one in less than a decade.
This impending insolvency has led to talk of social security benefits being reduced, being taxed more, or even being eliminated for some. We hope it will never come to that but if wishes were horses, beggars would ride.
Additionally, the last five decades have seen a major shift in the way people’s retirements are funded. My more mature readers remember a time when pensions were common. In many cases, if you worked at a job for 25 years, you could retire with the expectation that you would receive a set amount of money every month, for life.
In my profession, we call pensions defined benefit plans. The benefits you would receive were defined clearly and in advance. You could count on it.
Around the early 1980s, defined benefit plans began to give way to defined contribution plans. You know them as 401K and 403B plans. They are the same for the most part. The former is for employees of private sector companies and the latter for non-profit organizations and government employees. I will refer to both simply as 401K plans hereafter, since they are the same in most respects. Additionally, far more people have 401Ks than 403B plans.
The important difference between defined benefit/pension plans and defined contribution/401K plans is how they are funded. Pension plans are funded by employers who set money aside that is invested for you in order to fund lifetime retirement income.
401K plans are funded by a combination of employer and employee contributions. In most plans the employer will match the employees’ contributions up to a certain percentage. In many plans, if the employee saves nothing, the employer matches nothing.
This was a monumental shift. We went from a time when millions of workers’ retirements were all but assured until today, when virtually no aspect of their retirement can be assumed. Interestingly, though perhaps not coincidentally, as pension plans became less and less numerous during the 1980’s and beyond, there was a sudden explosion in corporate compensation. So, while it has not been a boon for the rank and file worker, C-suite bonuses have never been higher. But I digress.
Put plainly, the responsibility of preparing for retirement has shifted from corporations and institutions to American citizens. This experiment is not going well.
According to Yahoo Finance, only 9% of Americans have between $100,000 and $200,000, and 4% have between $200,000 and $350,000 saved in retirement accounts. To put that in perspective, $350,000 spent down from age 65-85 would produce only $17,500 per year (without a rate of return.) Not very much, and that is for the top 4% of savers!
As a country, we are heroically under saved. For those of you in your 30s, 40s, 50s and even 60s, depending on how long you plan on working, there is time. But most folks must save more. Many folks must save much more, since they are currently saving nothing.
The way to do it is to make savings compulsory and automatic. We must return to our grandparents’ attitude of spending what we have left over after we save, instead of saving what little we have left after we spend. This will place us in a better financial position now and in the future, open a greater number of options for ourselves and those we love, lead to enhanced peace of mind, and ultimately, real wealth.
I cannot begin to tell you about all the nonsense I regret wasting money on in my younger years. No one can go back to the beginning and get a new start; everyone can start from now and make a new ending. The power to shape our future is in our hands.
If you would like help formulating and following through on your new and wonderful ending, call me at 732-844-3000. I am here to help. The time to act is now!
Scott R. McGimpsey August 31st , 2024
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Neither Cetera Advisor Networks LLC nor Scott McGimpsey is engaged in rendering legal, accounting, or other professional services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm.