Retirement Planning - Making Your Money Work for You

When Social Security was formed in 1935, it was a very different time and environment. When it was first implemented for retirees, it was created to last for a much shorter time period due to that era’s shorter life expectancy. The increased life expectancy in the U.S. has put a strain on the retirement benefit provided by Social Security. Even with the normal retirement age increasing to 67, Social Security and Medicare are both slated to run out of funds when the major portion of baby boomers, a very large demographic born in the United States from 1946-1964, take benefits.

Some alarming statistics, from “Financial Decisions for Retirement”:

* Without Social Security, nearly 50 percent of American senior citizens would be living in poverty.

* For nearly two-thirds of seniors (65 percent), Social Security is their major source of income. In other words, it is more than one-half of what they have to live in retirement.

* Social Security is the only source of income for nearly one-third of seniors.

In tandem with the increasing uncertainty of Social Security benefits, major changes have occurred in the retirement benefits offered by Corporate America. Historically, retired seniors had a company pension that provided a stated level of income because benefits were provided through defined benefit plans. In these plans, companies provided income for their workers in retirement based on their years of service and most recent salary. The employer took on the investment risk and contributions, and the long-term employee could depend on a comfortable income at retirement age. Defined-benefit plans even had insurance covered by Pension Benefit Guaranty Corporation (PBGC). In essence, the employee’s retirement was taken care of between their pension benefits and Social Security.

Due to companies’ risk aversion, defined benefit plans are going the way of the dinosaur. Instead of ensuring sufficient contributions and weathering the investment risks, employers have passed responsibility for these decisions to their employees. As a result, 401(k) and other “defined-contribution” plans are more prevalent. A defined-benefit plan is managed and funded by the employer, whereas the defined-contribution plan is funded, for the most part, by the employee. The employee decides how much to contribute—and therefore how prepared they’ll be for retirement years—and whether those dollars will be invested in high-risk or conservative funds. In a defined-contribution plan, the employer is not compelled by actuaries and plan requirements to adequately fund the employee’s retirement, nor is insurance provided, as is the case in a defined-benefit plan. The only one looking after the employee’s retirement in a 401(k) is the employee.

Based on the uncertainty of Social Security and the elimination of the defined benefit plans provided by employers, future retirees must educate themselves and plan accordingly. That means balancing today’s spending with tomorrow’s needs.

A good place to start is by looking at your nest egg. A retirement calendar, a free service offered by many personal finance sites, will look at your current savings rate, retirement accounts, inflation, etc., and can give you a good idea of what shape you are in for the future. Your financial advisor can also help utilize these tools. Running a retirement calculator on a regular basis can keep you on track. Making changes as to how much or how often you contribute to retirement can pay huge dividends later.

With life getting in the way, many people put off examining their retirement savings. This is like putting off getting gas or service on your car—eventually, it will catch up to you. Do yourself a favor and take time (this week!) to sit down and review.

The bottom line is that your future retirement is up to you. As the old adage goes, “You work hard for your money, so make your money work hard for you.”

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