Pensions (defined benefit plans), as we know them in America, are quickly disappearing and this destroys retirement solutions for many. Private companies have frozen 37% of defined benefit plans, either closing them to new employees or freezing accruals entirely, according to U.S. Bureau of Labor Statistics data.
More pension plans offered by companies will cease or terminate in the next few years.
If you are working, the pension plan is likely to cease and your balance will be rolled over into a 401k -- meaning that any future contributions to your retirement plan will come from you, not the company. If you are already retired, it's likely you will get a lump sum payout as the employer will terminate the plan. In other words—you're on your own. Start with the retirement income calculator to determine your needs to develop your own retirement solutions.
When it comes to retirement resources, you must fend for yourself. Companies, being for-profit entities, are facing the music and closing down their plans because they simply cannot afford them. The US Government can delay facing the music and keep people in denial that the Social Security system will never sustain itself. While people currently age 65 or older will likely not see any changes to their Social Security benefits, they will likely see a dilution in their employer retirement benefits, possibly with a reduction in monthly pension payments or the reduction or elimination of health care benefits. Those under age 65 should not rely on anyone but themselves for retirement solutions.
Retirement Solutions in Your Control
Fortunately, there is a lot you can control that determines your comfort in retirement. These retirement solutions include:
Where you live—if you live in a high costs area (e.g. New York, California), move to a lower cost area. You may not like this option, but it could be the keystone to your retirement solution program. Lower housing costs mean more that you add to your retirement nest egg.
As an example, I live in California where the price of real estate has created large equity for many. I can sell my home and buy a comparable home using only my equity almost anywhere in the US. I would eliminate my mortgage payment.
The income you need to afford the average home in each state varies from $40,000 to $138,000. The amount also varies tremendously within each state. So choose your retirement location wisely. Also, factor into the total housing cost property tax and income tax.
Opt for savings and not luxuries—vacations, luxury cars, dining out, even driving 75 on the freeway instead of 55 all take money out of your pocket today that could go to retirement savings.
I drive a 10-year-old car. I will likely have it for another 10 years. Although I could afford to get the latest model every two years, such choices would be foolish for my retirement planning. What financial habits do you have that are wasteful or unnecessary?
When you Retire
Some studies have linked working past retirement with better health and longevity. It has long been known that an important factor of longevity is social interaction. What can keep you involved socially better than going to work? The other impact is on cognitive skills: use it or lose it. Keeping your brain active is the best way to keep decreasing cognitive ability at bay.
Keep working—you may still retire from your current job at retirement age but consider doing what you enjoy and also making money. You can get a HUGE impact on your retirement solutions by working more years (you get the double benefit of not consuming any of your retirement nest egg and having it continue to grow for each year you continue to work).
Work part-time. Finding part-time work with flexible hours is easier than ever. The gig-economy allows you to find work without having specific skills (e.g. Uber). Most importantly, the extra income may preclude the need to touch your retirement capital and provide more flexible retirement solutions. Alternatively, the extra income could allow you to start Social Security benefits later. The later you start, the more you get (up to age 70).
Two other factors make part-time work easier to find. The service sector of the economy is growing faster. These jobs usually do not have high pay but they also do not require special skills. The demand for labor exceeds supply for these positions. Secondly, companies prefer part-time labor as such workers typically do not receive benefits.
It's easy to let money sit rather than be properly invested. As you see from the table below, investors expose half of their 401k assets to equities and this should be higher, particularly for those more than ten years from retirement.
Even if already retired, the data shows that keeping at least 50% of your money in equities helps you from running out of money. Moreover, dividends from blue chip stocks have proven to be the best inflation-adjusted source of income over decades.
Mutual Fund Systematic Withdrawal
Say you have a mutual fund with $100,000. On average, it has earned 8% annually. Most of that earnings have been through capital appreciation. In years when the market is up, your fund is up and vice versa. You can have your mutual fund company send you $8,000 annually as a fixed amount.
In theory, the $8,000 is equal to the average 8% earnings and your $100,000 balance should remain stable. In practice, that will not happen. Your outcome will depend on the variation in annual returns.
If the next 2 years are bad and the fund falls by 10% in each year, here are the results:
|1st year change in value||-10,000|
|1st year withdrawal||-8,000|
|2nd year change in value||-10,000|
|2nd year withdrawal||-8,000|
|Starting value year 3||64,000|
Your results are very sensitive to change in the fund value in the early years after you begin systematic withdrawals. If the early years are positive with big gains, then your fund value will easily withstand later losses. How can you be certain of receiving the same amount annually, indefinitely?
Annuitization means to withdraw from the principal as an income source. Determine how much of your assets you are willing to "annuitize." Some retirees are fixated on leaving an inheritance or a house to their heirs. If they annuitize that asset into an income stream, they can live more comfortably. Annuitization can be accomplished with or without commercial annuities.
If you use commercial annuities, the issuing insurance company guarantees a lifetime income. It's like a second social security check in that it is income you cannot outlive.
For example, in August 2018, a male age 70 investing $100,000 will get $606 monthly for life. The $100,000 cannot be recovered. In return, the insurance company guarantees the income for life.
Ordering is a simple concept. By withdrawing money from accounts where you pay the least tax, you have more money to spend. Thefeore accounts like IRAs, 401ks, and annuities should be the last accounts from which you withdraw (the exception is annuitization of an annuity). Even retirees with modest savings can increase their spendable income significantly be paying less tax with ordering.