Lack of adequate income at retirement is the next gigantic financial shoe to fall, and it is going to fall hard.
Consider in 1981 nearly two out of three workers had a quality pension plan, not a 401(k). Employers would agree to pay 60 percent of the last 25 years’ salary each month for the life of the employee and their spouse. This was not a “do it yourself” 401(k) like what employers “offer” today. This was not “everyone is on their own and good luck.” This was not a “you have to be your own investment adviser.” It was cash-solid and backed by life insurance companies with guarantees.
Let me explain a defined contribution plan. In today’s world, most people have a 401(k) where an employer defines what they can afford to place into your individual tax-deferred account (a 401(k) or 403(b) or 457, etc.) as a percent of your income. Example: 5 percent of your salary would be saved for you in this tax-deferred plan. Sometimes you are required to save the same amount or the employer will not contribute anything. The cost to the employer for doing this plan is just the 5 percent and administration expenses. If your salary is $60,000, then the employer puts $3,000 each year into the plan.
Now let me explain the cost of a defined pension plan. This is where the employer promises to pay, say 60 percent of your income to you at retirement using the top three years of your salary as the average. Plus they will pay this for your lifetime and continue to pay it to your spouse after you die. Let’s put some numbers to this kind of a plan. If your salary is $60,000 then you would get paid $36,000 per year for life. Assuming you live to age 83 and you turn on this pension at age 68, you will receive $540,000 (and let’s not forget, if your spouse continues to live on after you, this $36,000 per year will continue, thus increasing that $540,000 amount possibly).
How much money will it take your employer to deposit enough in your account
each year to achieve this $36,000/year goal? Answer: $7,000 a year, as long as the employer can earn 5 percent on this money. Let’s say the employer can only get earnings of 2 percent each year? Then they would be required to deposit into your pension account $10,500 a year. Don’t miss this point: Under the old pension plans, the employer assumed all the risk! Even if the funds lost money, the employer had to make up the difference. This got so expensive employers could not afford to offer pensions anymore and started switching over to defining the annual amount they could put into you account using deferred 401(k)s.
When people retired at age 65 and died at age 69, the employer was in good shape financially. But think of how long people are living today. If a couple reaches age 65, they will live well into their 80’s. No employer can afford to pay this kind of money. Using my example above, the difference is either $3,000 a year or $10,500. Which do you think your employer can afford?
The Social Security Administration states that 90 percent of all retired folks are totally dependent upon their Social Security monthly income. For those retiring right now, that income isn’t half bad, but as more people retire and the system becomes drained, there won’t be much of that income to live on. Therefore, people will have to work longer, even into their late 70’s. And what about other things that eat into traditional retirement savings programs such as IRAs and 401(k)s, things like fraud, inflation,, out-living income, needing long-term care, market risk, lack of organization, more taxation, not understanding how to get the most out of Social Security, and a host of other problems attending retirement decisions?
What is the answer to the nonsense of the traditional retirement “planning” formula?
To be successful in retirement, a person must think in terms of the following:
First, stop going with the herd and start looking at new options for funding retirement that are a lot less risky than a 401(k).
Second, learn how to control spending so you don’t add any more debts to your load.
Third, learn how to pay off all debt quickly, including your mortgage, in under 10 years. Impossible you say? Not hardly. It is mathematically possible for anyone with five or more debts to eliminate all of them in under 10 years by applying debt Power Down principles.
Fourth, change the way you think about accumulating money for retirement. A person has to switch from focussing on a rate of return, and start locking down guaranteed income for life. Most people work and try to save, but want the best return. How well was that retirement strategy working for those people who were ready to retire in 2008? When you lose 40 percent of your nest egg because you had it in a 401(k) that was invested in the market, you have to keep working. If those folks locked down a guaranteed income for life, they would not have lost one penny.
The conclusion to draw here is anyone that has a 401(k) or it’s look-a-like, has to be their own investment adviser. They have to assume all the risk. They have to be the one in control, but unfortunately, they don’t control what happens in the market. I hope you know that no one else has your best interest at heart. If you are going to continue playing the defined contributions game it is imperative that you become a savvy and skilled investor, something that takes a lot of time and effort, in addition to working your job and taking care of family. If you would prefer to take a different retirement road, one that does not require that you learn how to play the stock market in order to build a solid financial future, please contact me: peter@moneymastery.com or visit www.moneymastery.com. There are lots of ways to build wealth on ANY income that do not involve defined contribution plans. Learn about them now!
