Retirement Planning Part 1 – A Disaster

The average American does not have an adequate retirement plan. Why, because he/she isn’t ready to retire yet. The problem is that by the time you begin thinking about a retirement plan it may be too late to effectively craft one. Most people in their 50’s are enjoying their lives and are in their highest earning years. Yet their retirement plan is basically to keep contributing to their 401K plans at work, save some money and continue to spend based on their increased income. So, what’s the problem? Times have changed and many people are facing a disaster when it comes time to retire.

Here is what is different:

  1. Here is what is different:
    1. The days of pension plans are almost gone; they have been replaced by Defined Contribution Plans, like your 401K at work. There is a big difference. A pension plan was an annuity, your company paid the entire principle and you were guaranteed a set income for life. Your 401K plan probably won’t last you a lifetime and the underlying investments are not guaranteed. Ask the people who retired in 2007-2008 and had to dip into their investments when the market hit bottom.
    2. Your 401K plan has contribution limits and is, in many cases loaded with internal fees and costs. Typically they are not self-directed and offer limited choices for investments. Many of the investment choices have little or no visibility in what the core equities or bonds are. Financial institutions that manage these make their money on both fees and “turns”.
    3. Many people have IRA’s and taxable brokerage accounts where they invest their savings. They choose mutual funds, stocks, bonds and ETF’s they think will appreciate over time and match or beat the overall market. However, they have no idea when to buy, when to sell and how to pick the right investments to match their goals. The majority of investors don’t re-balance their holdings, don’t under tax efficiencies and actually buy high and sell low. A real disaster.
    4. Savings are great, but most really safe retirement type investments are yielding a fraction of what they traditionally yielded. In past years you could just put your money into secure bonds and collect your 6-8%, these are now yielding 2-3%. Your savings account, less than 1%. How could you possibly withdrawal 4% a year in retirement if you are only making 2-3%, paying tax on it and having it be subject to inflation.
    5. You are going to live a whole lot longer than prior generations, and may very well out-live your money. Our excellent healthcare system is going to make sure you are both healthier and poorer.
    6. Owning a home is no longer a piggy bank or a guaranteed investment. Safe shelter may be a requirement but may not guarantee you the kind of appreciation it did in the past.
    7. People today just find it hard to save, or easy to spend. Take your pick.
    8. Many people believe they can live on 80% of their pre-retirement income levels, they probably can. However, they don’t know how much they will need to fund the 80% for the next 30-40 years. If you are an average 50 year old male today you have a 25% chance of living past 92 years. Many of us have relatives that are already that old.

There are ways to plan for your retirement that are simple to follow and will at least help you plot a course. It’s your job to plan for the security of your retirement. In upcoming posts I’ll give you some helpful suggestions on how to do this.

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