Who is responsible for your retirement?
Posted by vanguard23
While still amidst Hawaii’s hurricane season and with folks on the southern part of the Big Island of Hawaii trying to put their lives back together in the aftermath of Hurricane Iselle’s devastating winds, the storm clouds forming in the eastern Pacific Ocean reminded me of an ominous article I read regarding the lack of retirement savings for Americans. As a recent early retiree, I was appalled to read a recent CNNMoney article stating almost 1/3 of Americans have no retirement savings at all. Despite not too recent government efforts to encourage Americans to save for retirement with tax-advantaged accounts such as IRAs and 401(k)s (as well as recent efforts to make investing in 401(k) plans a default option), especially with only about 11% of Fortune 1000 companies still offering defined benefit plans or pensions (continuing the downward trend from 90% of companies offering pension plans just three decades ago), certain people still fail to plan for those retirement years. Additionally, a growing number of companies with pension plans close those plans to new employees and offer mostly defined contribution plans to new employees such as 401(k)s or 403(b)s for non-profits. Responsibility for funding those retirement years are becoming solely on the shoulders of the American workers.
Most folks with little to no retirement savings are helplessly resolved to working until they can no longer work while also expecting the government to supplement their financial needs at retirement…hoping for a Social Security System to remain solvent through their retirement years despite various studies and reports projecting bankruptcy of the Social Security Trust Fund as early as 2033. While there are views on opposite ends of Social Security’s survival, it is safe to say that Social Security, as we currently know it, will have to change to ensure it remains in place to provide for those qualified Americans during retirement.
If one is not fortunate enough to work for a company (or for most of the public sector employers) offering pension plans, it is doubly important to harness the benefits of tax-advantaged accounts as early as possible and have high enough savings rates to fund those retirement years. However, even those employees whose employers provide 401(k) plans and who take advantage of their company’s 401(k) plans, fail to contribute enough to fund even a bare bones retirement, with average 401(k) contributions at about 6%. Far less than the minimal recommendation of 10% or 15% (assuming of course there are no additional contributions to IRAs and/or taxable accounts) for saving and investing for those workers who would not be expecting a traditional pension after their working years. For those who started late with their saving and investing, this percentage would have to be much higher than 10% or 15%.
My wife and I are fortunate enough to be getting pensions upon retirement…yet we still contributed religiously to our retirement accounts, contributing the maximum to our TSP and our IRAs, in addition to funding taxable accounts. We saved and invested at least 25% – 35% of our income and have even ramped that up to over 45% at times. Despite all these “ramped up” contributions towards our retirement accounts, we never felt deprived and we maintained the lifestyle we’ve always enjoyed, with occasional travel (although our travels would be on overdrive for the next year or so), hobbies, home upgrades, etc. I don’t think we ever thought we could retire early and not have to be compelled to seek employment after our first retirement…but saving and investing prodigiously provided us options.
I suppose it is a matter of identifying what is important to you. What is it that you value most? Some folks are willing to risk their retirement future and would rather fund their desire to own and drive multiple new and luxurious vehicles…the latest in consumer electronics…the biggest and flattest LED Smart HDTVs…the poshest vacations…season tickets to their favorite sports teams. There’s nothing wrong with that…as long as you are not sacrificing your retirement for those splurges. I read a piece about someone determining the value of an item by calculating how much the money earmarked for said purchase would appreciate over a 15 or 20 year period if invested in an index mutual fund with modest returns. By doing so, a purchase of a high end flat screen for $2,000 today would equate to over $5,500 in 15 years with a modest 7% rate. While spending $2,000 on a depreciating item, still a decent amount of money, might be easier to rationalize, maybe $5,500 would give one pause before pulling the trigger on that purchase.
In the end, one has to ask one’s self the question: “Who is Responsible for My Retirement?” You can roll the dice and hope and pray that any meager savings you have would be augmented by Social Security upon retirement…or maybe hope to win the lottery or some kind of sweepstakes…or maybe inherit some money from a departed loved one…or maybe have your kids take you in and take care of you during retirement…or maybe come to grips with working until your last dying breath. No one who reaches retirement regrets having saved too much. The common lament is not having saved enough or not having started earlier with saving and investing…or not educating themselves about where to put their money. We prefer taking control of our own retirement and minimize dependence on outside agencies or events that are beyond our control. While I admit that the “overarching retirement plan” remained malleable and wasn’t solidified until about less than a decade ago, our savings habits and frugal lifestyle laid a solid foundation. We had a plan for the future. A powerful adage resonates in my head when encountered with retirement planning: “People do not plan to fail…they fail to plan.”