Sunday, December 14, 2014

Defined Contribution 401(k) Plans Are Replacing Defined Benefit Pension Plans .... That's a Big Deal

We  have long been in the process of transitioning from employer guaranteed pension benefits to employee provided unguaranteed retirement 401(k) benefits. That's a big deal.

The responsibility for individual planning, funding, investing and preparing for a financially secure future has changed in a big way. At the same time, however, people haven't received the necessary training and education required to do the job. That's also a big deal.

Since more and more the responsibility for providing financial security and retirement income now belongs to us as individuals, taking the time to become knowledgeable about the basics of 401(k) investing will certainly be time well spent.

In the 'old' days, employer provided guaranteed defined benefit pension plans were the norm. Those plans enabled individuals to avoid any responsibility with respect to planning and for the most part providing for their financial security.

A combination of Social Security and employer provided pension benefits formed the traditional route to achieving a secure and satisfactory level of retirement income. But today it's quite often not that way, and it definitely won't be that way tomorrow.

Individual employees will be responsible for setting aside enough money and then investing that money properly to achieve a successful and secure retirement income result. Those who commit themselves to learning by doing will be well rewarded for having done so. It's not that hard to do.

12 Things to Know About Retirement tells the developing story of how things have changed and are changing:
"(Here's) a four-part recipe for assuring that Americans can afford to retire comfortably:

Work longer. Fix Social Security. Save more through 401(k) accounts. And consider home equity as retirement savings.

(These) . . . facts about retirement that are well known to experts and little understood by the public (and by some politicians). . . .

1. Well into the 19th century, about half of the men who made it to age 80 still worked; retirement usually meant a couple of years, most of them in poor health.

2. In 1960, the average number of years spent in retirement was 13. In 2010, it was 20 because so many people retired earlier and lifespans had lengthened. Under current trends, it’s projected to be 22 years in 2050.

3. Among men age 65 in 1980, half could expect to live beyond age 79.7. In 2000, half could expect to live beyond age 82.6. Among those who’ll turn 65 in 2020, half are expected to live beyond age 84.7. . . .

7. The share of wages that Social Security will replace for the typical worker who retires at age 65 was 48% in 1980, 37% in 2000 and, under current trends, will be 34% in 2020.

8. Americans have $3.1 trillion in assets in defined-benefit plans (those that pay a pre-set amount), $4.7 trillion in defined-contribution plans (such as 401(k) accounts), and $6.2 trillion in individual retirement accounts. . . .

10. About 20% of the workers who are eligible for employer-provided 401(k) retirement plans do not participate.

11. Of those who do participate in employer-provided 401(k)s, only 10% contribute the maximum amount allowed by the tax law.

12.  Among households with a worker age 55 to 64, about 52% have a 401(k) and, of those, the median balance in 2013 was $111,000."

Summing Up

Times have changed in retirement planning and funding. They will change even more as companies and governments transition more and more to defined contribution plans.

Public employee pension plans are too costly and have become unaffordable due to lack of proper funding and the rich unfunded benefits that have been promised. It's sad but it's true.

Self reliance is on its way to retirement planning and investing. Thus, it's time for all young people to take this subject seriously while there's still time to achieve a favorable outcome.

That's my take.

Thanks. Bob.

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