WHAT DO YOU FEAR MORE, RETIREMENT OR DEATH?

Disclaimer: Good Day, Readers.  WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.  

A recent survey showed 40 percent of Americans are more afraid of running out of money in retirement versus death.  When you add in the risk of catastrophe illness and the cost of quality long-term care, the risk of running out of cash worsens. 

Today only 18 percent of Americans retire with what they believe adequate funds to maintain their desired standard of living. The Majority have reduced their spending, thus slowing their retirement savings burn rate. Many simply keep working part or full-time jobs.  Ten years after retirement, 52 percent of Americans believe they have insufficient funds to last!

Today’s blog looks at this challenge and some solutions.

NOT OUR PARENTS RETIREMENT

The problem is worse today than my parents’ generation because pensions in the private sector have been eliminated. VOLUNTARY 401-K plans have replaced the Majority of companies’ pensions.  The 401-K was designed to mimic a pension’s retirement income.  BUT only if YOU:

  • Start saving EARLY, in your 20’s, 
  • Contribute a significant percentage of your compensation to your plan, 
  • Work for a company that matches some portion of your savings,
  • Pick the right funds,
  • Get EVERYTHING RIGHT!

The 401K plan removes the financial obligation from corporations and places the cost and risk on employees.  Unfortunately, many employees lack the financial literacy to succeed. 

TODAY YOU HAVE BETTER ODDS OF MEETING AN HONEST POLITICIAN VERSUS LANDING A JOB WITH A TRADITIONAL PENSION

The reason – MONEY.  As life expectancy increased, companies recognized they could not continue paying generous pensions and making the profits demanded by stockholders. 

TODAY LESS THAN 16 PERCENT OF FORTUNE 500 COMPANIES OFFER TRADITIONAL PENSION PLANS 

Over the past 20 years, the percentage of Fortune 500 companies that offer a traditional pension plan has fallen from 60% to 16%.  The majority of companies no longer offered a pension for new employees and froze pension plans (stopped contributing) for existing employees.  For today’s U.S. workforce, only 4% have access to a traditionally defined benefit pension plan 

RETIREMENT RISK – IS YOURS!

Pensions and 401-K’s both provide means to save for retirement and to pay money out. Still, the way employees accrue money has one key difference: The employee owns the risk and responsibility of investment management in the 401-K plans.

For a pension, the company and employee pay into a pool of money. Then the company invests that money and HOPES (HOPE is NEVER A STRATEGY) enough to produce a defined benefit when the employee retires. If the company makes poor investments and the cash in the portfolio fails to grow at projected rates, the company has to pay the difference out of its profits. 

THE 401-K

Many companies offer 401(k) plans, and many automatically enroll employees into their programs 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 are enough to live on for the rest of their lives. 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, losing out on hundreds of thousands of dollars when you take into 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, considering inflation.  Use these free tools to identify how much you need to increase your contribution.  

Third, avoid mutual funds with high fees.  Approximately 90% of managed mutual funds not only underperform indexes but charge you extremely high fees.  STAY AWAY FROM MUTUAL FUNDS Most 401K plans today offer something similar to an S&P 500 ETF Index fund or other index 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.

CONCLUSION

A simple formula 

  1. Sorry, you will need to do a bit of math. Calculate your retirement income needs by predicting your retirement monthly cashflow needs.  Include the cost of health care insurance and out-of-pocket cost. There are online calculators to help once you have this rough number.
  2. Gather your projected SS Payment
  3. https://www.ssa.gov/OACT/quickcalc/
  4. Calculate expected pensions monthly payments.  Utilize your company’s pension website(s).
  5. Projected 401K amount at retirement.  Most 401K’s allow you to predict the final amount at retirement.  Assume you can safely withdraw three percent without reducing the amount.  Or you can take a four-percent withdrawal rate. 
  6. Projected IRA Account balances.
  7. Annual Needed Income – (Projected Social Security + Annual Pension Payments + Annual Dividends + Rental Income + Annual Annuities + Four percent withdrawal from 401K + Four Percent withdrawal IRA + Any other income)   
  8. Design strategy to close any gap
  9. IMPLEMENT YOUR STRATEGY AND ENJOY RETIREMENT!

THE CHOICE IS YOURS

I was raised in a state-ranked 49th to 50th in quality of public school education. My county was at the bottom of the list. In my 20’s I realized the importance of the 401-K plan and pensions. During the course of my career, I watched my employers stop their defined pension plans and encourage employees to contribute to their 401K plans. STOP making excuses you cannot afford to contribute to your 401K, IRA, ROTH IRA. Your very livelihood depends on you making the right choices!

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ABOUT ME

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with aN.C.C. State, Chemical Engineering, University Rutgers, MM.B.A.and Harvard University, Advanced Management education.

I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life.  It is my time to serve and give back.

DISCLAIMER

I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and am happy to share my finance and investment lessons.  I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss. 

 Please seek your licensed CC.P.A.or fiduciary financial advisors for individual financial advice.  

I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.

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Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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