Corporate jobs used to bring cushy retirement checks to fund your golden years. But these days, private pensions—also known as defined benefit plans—are quickly becoming the stuff of legend. That’s left a lot of folks yearning for the past.
Some naysayers criticize the 401(k) as a “failed experiment” because it puts workers in charge of their own retirement destiny. Last we checked, being in control was a good thing! And now, there’s research to back it up: A recent study by the Employee Benefit Research Institute (EBRI) found that early savers end up with more money at retirement with a 401(k) than with a private pension.
So is it time to bid a fond farewell to days gone by?
Let Bygones Be Bygones
With a pension, your employer picks up the retirement tab, and you enjoy guaranteed income for the rest of your life. What’s not to love? The problem is it’s not yours—it’s theirs! So if your company goes broke or you lose your job, your nest egg is toast. That’s a risky way to plan for the future.
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If you don’t think it can happen to you, ask an airline employee. Nearly 30% of the total pension default claims handed over to the Pension Benefit Guaranty Corporation belong to major airlines. United Airlines and US Airways both closed the books on their employee pension programs in the wake of the September 11 World Trade Center attacks, affecting nearly 180,000 current and former workers. Some pilots saw six-figure pensions shrink to a fraction of what was promised.
Of course, public pensions aren’t fail-safe either. The latest data from Governing Magazine reveals 38 municipalities have filed for bankruptcy since 2010. Local governments on the list include Detroit, MI; Jefferson County, AL; San Bernardino, CA; and Stockton, CA.
A Ray of 401(k) Hope
The past couple of decades have no doubt been a period of transition. With pensions on the decline and Social Security looking less than reassuring, workers have had to make the jump from sponsored to self-funded retirement plans. That shift happened mid-career for most Baby Boomers, so they haven’t had a chance to see their 401(k)’s full potential.
Millennials, on the other hand, have come into the workforce knowing retirement is up to them, and they’re off to a great start. Consider these stats from the TransAmerica Center for Retirement Studies:
—Two-thirds of Millennials expect to self-fund retirement, and 70% are already saving.
—Millennials set a precedent for saving early, starting at a median age of 22. That’s 13 years ahead of Baby Boomers.
—The typical Millennial saw their retirement savings increase from $9,000 in 2007 to $32,000 in 2014.
And that’s not all: According to the EBRI, low-income workers in their mid- to late-20s who invest in a 401(k) plan and remain eligible for 30–40 years could replace 15% more of their income at retirement. Those in the highest income quartile were on track to replace 44% more income at retirement!
Not sure this applies to you? This study was based on voluntary enrollment for millions of participants—and some participants chose not to contribute anything to their accounts. With automatic enrollment becoming the norm in more workplaces, those numbers are bound to go up!
Don’t Leave Your Future Up to Chance
If a pension is part of your retirement portfolio, you’re one of the lucky few. Just don’t rely on luck as your only source of retirement income. Take control of your future by investing 15% of your household income into tax-advantaged retirement accounts like a 401(k) or Roth IRA.
Here are a few strategies for success:
Talk to a pro. If you’re not an investment expert, that’s okay! Sit down with someone who is. A good financial advisor will take time to explain all of your options in terms you can understand so you can decide what’s right for you.
Find funds you’re comfortable with. Dave recommends good growth stock mutual funds for retirement investing. Look for funds with a long history of above-average returns, and spread them evenly across these four categories: growth, growth and income, aggressive growth and international.
Stay the course. If there’s one thing you can expect from the market, it’s that there will be ups and downs. But pulling investments at the wrong time can wreck your ability to retire with confidence. A trustworthy advisor can help you develop a plan and stick with it when short-term fears cloud your long-term vision.
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