EMPLOYER RETIREMENT PLANS
Does your employer offer a Sponsored Retirement Plan?
Did you know that according to a recent survey by Charles Schwab only 25% of people have a financial plan and that 60% of people live paycheck to paycheck? To have a comfortable, secure—and fun—retirement, you need to build the financial cushion that will fund it all.
If your company sponsors a Retirement Plan benefit, make sure to educate yourself as to why it can be prudent to join the plan and begin saving for your future.
Why save in a retirement plan?
For much of the 20th century, retirement in America was traditionally defined in terms of its relationship to participation in the active work force. An individual would
work full-time until a certain age, and then leave employment to spend a few years quietly rocking on the front porch. Declining health often made retirement short and unpleasant. Retirement planning, as such, typically focused on saving enough to guarantee minimal survival for a relatively brief period of time.
More recently, however, many individuals are beginning to recognize that for a number of reasons, this traditional view of retirement is no longer accurate. Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s. Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65. And, many retirees do more than just rock on the front porch. Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports.
This changed the face of retirement, however, with all of its possibilities, does not happen automatically. Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, however, these needs can be met.
The single most important factor in this changed retirement picture is the fact that we now live much longer than before. A child born in 1900, for example, had an average life expectancy of 47.3 years. For a child born in 2017, however, average life expectancy had increased to 78.6 years. The following graph illustrates this change.
Common Retirement Planning Issues
Planning for a much longer life span involves addressing problems not faced by earlier generations. Some of the key issues include the following:
Paying for retirement: Providing a steady income is often the key problem involved in retirement planning. Longer life spans raise the issue of the impact of inflation on fixed dollar payments, as well as the possibility of outliving accumulated personal savings. Social Security retirement benefits and income from employer-sponsored retirement plans typically provide only a portion of the total income required. If income is insufficient, a retiree may be forced to either continue working, or face a reduced standard of living.
Health care: The health benefits provided through the federal government’s Medicare program are generally considered to be only a foundation. Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare. Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual’s wishes when no hope of recovery is possible.
Estate planning: Retirement planning inevitably must consider what happens to an individual’s assets after retirement is over. Estate planning should ensure not only that assets are transferred to the individuals or organizations chosen by the owner, but also that the transfer is done with the least amount of tax.
Housing: This question involves not only the size and type of home (condo, house, shared housing, assisted living), but also its location. Such factors as climate and proximity to close family members and medical care are often important. Completely paying off a home loan can reduce monthly income needs. A reverse mortgage may provide additional monthly income.
Lifestyle: Some individuals, accustomed to a busy work life, find it difficult to enjoy the freedom offered by retirement. Planning ahead can make this transition easier.
Seek Professional Guidance
Developing a successful retirement plan involves carefully considering a wide range of issues and potential problems. Finding solutions to these questions often requires both personal education and the guidance of knowledgeable individuals, from many professional disciplines. The key is to begin planning as early as possible.
Where will your retirement income come from?
Social Security accounts for only 33% of income for people 65 and over in 2018.
Know Your Potential Sources of Income
- Will Social Security Be Available?: Social Security accounts for only 33% of income for people 65 and over in 2018 By 2034, Social Security may not be able to meet all of its obligations according to the Social Security Board of Trustees. Notably, the 401(K) retirement plan legislation that was adopted in 1978, was to encourage retirement savings, and NOT rely on Social Security.
- Health care: The health benefits provided through the federal government’s Medicare program are generally considered to be only a foundation. Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare. Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual’s wishes when no hope of recovery is possible.
Factors That Help You Be Prepared
- Take the Match: Many employers offer a matching contribution to your retirement plan contributions. This is a huge benefit to you, as it will dramatically accelerate your retirement savings.
- Start Early: Three factors determine what your retirement investment will be worth- amount invested, rate of return, and duration of investment. Starting early lets you invest less each week to reach the same goal over time, but its never too late to start! Start Now!
Assuming a 5% rate of return, a $250 monthly contribution and monthly compounding to the age of 65. The hypothetical example above is based on a mathematical principle and represents no particular investment. There is no guarantee these results will be achieved. It is used for illustrative purposes only. There are risks associated with investing, including but not limited to, loss of principle.