YOUR BIGGEST RISK TODAY – A LONG LIFE!
A large percentage of today’s retirees are facing a “longevity crisis” and outliving their savings. Some of my friends are facing this very real crisis. One spent the bulk of his 401K on his three kids’ college education. Because he loves his children. Two have small pensions and are financially struggling. Another is afraid he cannot afford to retire. When you add in the risk of catastrophe illness, their risk profile significantly worsens. Today’s blog looks at this challenge and some solutions
TODAY’S PROBLEM VERSUS PAST GENERATIONS
The problem is worse today than my parents’ generation, because pensions in the private sector are rapidly dying, Majority of companies’ pensions have been replaced by VOLUNTARY 401-K plans. The 401-K was somewhat designed to mimic a pensions retirement income. BUT only if you start saving EARLY, in your 20’s, contribute a significant percentage of your compensation to your plan, your company matches some percentage and you are good at picking the right mutual funds or bonds. In other words, you have to get everything right! The 401K plan does as it is designed, it places 100% of the risk on the employee.
GENERAL ELECTRIC (GE) WAS ONE OF THE BEST PENSION PLANS.
GE was known as a great company to work – for college graduates and hourly employees. GE paid generous compensation and pensions. This combination was the reason so many employees, including some of my family members, chose to work at GE until retirement.
Two of my relatives worked at GE, as hourly employees. They made good incomes, built nice homes, drove new cars, were able to send their children (that wanted to go) to college and now both are retired living off those generous pensions plus their earned social security. They are in pretty good financial shape. Those past GE plans and days are DEAD!
GE FROOZE PENSIONS AND OFFERED BUY OUTS TO RETIREES FOR LUMP SUMS
GE closed its pension to new hires in 2012. Employees hired after that date are solely dependent on their 401-K and own savings into IRA’s, etc. In addition, GE will freeze pensions for ~22,000 current workers, effective January 1, 2021. Those employees will not earn additional pension benefits but will keep what they already earned. They will of course still be able to contribute to the 401-K plan.
Majority of GE’s non salaried workers are in unions and their pensions are negotiated and protected by union contracts. Translation- harder to screw those employees.
GE is also offering buyouts to about 100,000 current pensioners. In a pension buyout, GE offers to pay a lump sum and frees itself of future liabilities. Anyone facing this decision should seek the advice of a fiduciary financial advisor.
GE once was the biggest provider of light bulbs in the U. S. The company finally sold that unprofitable division and the lights have dimmed for their employee’s long-term financial security.
The reason for above changes – MONEY. As life expectancy increased, the company recognized they could not or would not, continue paying generous pensions and make the profits demanded by it’s stockholders. GE also believes pensions make the company noncompetitive with their competition.
THE AMERICAN PENSION IS ON LIFE SUPPORT AND THE PLUG WILL SOON BE PULLED
Over the past 20 years, the percentage of Fortune 500 companies that offer a traditional pension plan has fallen from about 60% to 16%. Many company’s including my wife’s no longer offer a pension for new employees. Many company’s froze pension plans and stopped contributing for their existing employees. Pension plan freezes have been on the rise as well.
For today’s U.S. workforce, only 4% has access to a traditional defined benefit pension plan. Beyond GE many Fortune 100 firms, like Boeing, BP and IBM and MANY others have forced the existing employees into 401(k)s and eliminated pensions.
YOUR RETIREMENT RISK IS NOW ON YOUR SHOULDER
Pensions and 401-K’s both provide means to save for retirement and to pay money out, but the way they accrue money has one key difference: The employee owns the risk and responsibility of investment management.
For a pension, the company and employee pay into a pool of money. Then the company invests that money and HOPES (Remember – HOPE is NOT a Strategy) that it is enough to pay a defined benefit when the employee retires. If the company is a weak investor and the money in the portfolio fails to grow at projected rates, the company has to pay the difference out of its own profits.
Many companies offer 401(k) plans and many automatically enroll employees into their plans and match contributions up to a few percentage points. The employee assumes all the risk. Employees make all investment decisions and majority make poor decisions sticking their money in low return savings and CD like products. Meanwhile every employee hopes the market goes up and the amounts they contributed is enough to live on for the rest of their life. Today, many retirees have to make that money stretch for 25 or more years. That is a lot of pressure.
SO HOW DO YOU PROTECT YOURSELF
First, ENROLL in your 401K, on day one of your job! Many employees wait until their 30’s and 40’s to start contributing. And lose out on tens or hundreds of thousands of dollars, when you take in account the power of compounding.
Second, WAKE UP! Regardless of your age, ask yourself a simple question. When I retire, without a pension and HOPE to receive some Social Security payments, can I afford, housing, food, utilities, car payments, gas, health care and other expenses? Let me help you. HELL NO! You must not only start your 401K today, and the first day each time you start a new job, you must continue to increase your contribution percentage. Aim for the maximum amount. Increase your contribution any time you get a pay raise or promotion. Most 401-K Management Systems, help you calculate how much money you will have in retirement, taking into account inflation. Use these free tools to identify how much you need to increase your contribution.
Third, Avoid mutual funds. Most 401K plans today offer something similar to an S&P 500 ETF Index funds or other index fund. Approximately 90% of managed mutual funds not only underperform indexes but charge you extremely high fees. STAY AWAY FROM MUTUAL FUNDS!
Finally, continue learning. The more you increase your financial literacy/competency, the fewer mistakes you make with your HARD-EARNED MONEY! You will be more comfortable with investment decisions.
Warren Buffett’s business partner, Charlie Munger, offers this inspiration: “In my whole life, I have known no wise people who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life. It is my time to serve and give back.
I started my first business at ~13 years of age (small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and happy to share my personal finance and investment lessons learned with you.
However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or fiduciary financial advisors.