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Dave often says that winning with money depends much more on our behavior than our head knowledge, and this is especially true when it comes to investing for retirement. We’ve known for decades that traditional pension plans are becoming part of retirement history, but most of us haven’t changed the way we save to compensate for it.
The Great Retirement Risk Transfer
Pension plans, also known as defined benefit plans, provide guaranteed income for life for a retiree and the retiree’s spouse. Employees often contribute part of their income to their plan during their careers, but the employer takes on the lion’s share of the cost and responsibility of providing the benefits.
The expense and risk of providing guaranteed benefits to a growing number of retirees eventually became too much, and most businesses began slowly phasing out pension plans. In the 1980s, more than half of all retirees received income from a pension. The number of nongovernment workers participating in a pension plan has dropped from 35% in the 1990s to just 18% today.
Only 10% of all private-industry employers offer pension plans now. They’ve been replaced with defined contribution plans like 401(k)s, in which the employee is responsible for saving and investing for his own retirement. Today, about 55% of workers have access to a 401(k), but just 38% participate, according to the Bureau of Labor Statistics.
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A Growing Retirement Income Gap
This gap left by the pension’s decline and the lack of 401(k) participation is starting to show up in retirees’ incomes. Retirees with annual incomes greater than $50,000 are twice as likely to have a pension as a major source of their income. Most retirees without pensions do not have personal savings to make up the difference. As a result, their incomes are lower and they are much more dependent on Social Security.
A recent Employee Benefit Research Institute study focuses on what will happen if today’s future retirees continue on their current savings path. Workers who retire without any income from a pension plan have a 25% higher at-risk rating to run out of money to cover basic expenses in retirement than those who will receive pension income.
Tomorrow’s Retirees Must Take Action
Future retirees—that’s you—will have to be more disciplined about building a nest egg that will support them throughout their retirement. You can’t count on your employer or the government to supply your retirement needs, and really, it isn’t their responsibility to make sure you have a comfortable retirement. That’s up to you.
You’ll be glad to hear that building a cushy nest egg isn’t complicated. Start by getting out of debt and building an emergency fund of three to six months of expenses. That will give you the foundation you need to start building wealth for the future.
Commit to investing 15% of your income for retirement in good, growth-stock mutual funds through tax-advantaged retirement plans. Using this plan, a worker earning a $40,000 income could save $1 million to $1.5 million for retirement over his working lifetime.
Success Depends on Sticking to Your Commitment
The toughest part about taking responsibility for your own retirement is the commitment. It’s tough to maintain a consistent investing plan over 30 years or more. Sometimes, budget demands will challenge your determination, and other times the stock market’s wild ups and downs will make you want to hide all your money in your mattress.
That’s why it’s important to work with an experienced investing advisor you trust to guide you through the long-term retirement investing journey. Your advisor can help you choose the best investments, and they’ll be there to help you stick to your plan—even in the tough times.
If you’re looking for an investing advisor with the heart of a teacher, we can put you in touch with one Dave recommends in your area.