The makeup of your retirement income will look very different from that of your parents or grandparents. The older generation’s retirement income came from a pension check and social security check and possibly supplemented with savings or investment earnings. However, pension plans are dramatically decreasing in numbers and being replaced with defined contribution plans, where you defer your own income, such as 401Ks or 403Bs. This shifts the responsibility of saving for retirement from your employer to you.
The reduction of pension plans has been dramatic. In 1983 around 88% of workers were covered by a pension. In 1995, around 44% had pensions, and this number drops further to under 20% in 2013, according to the Center for Retirement Research. Senator Tom Harkin stated, “For most of the middle class, the dream of a secure retirement is slipping out of reach. The disappearance of pensions has had a profoundly negative impact on retirement security in this country.”
With a 401K, the employee needs to choose to participate in the plan. In some cases, you would be auto-enrolled, but have the choice of opting out. Once enrolled, you will decide how much to defer into the plan. Also, you’ll choose your investment options. It’s important to attend educational sessions and read material given out, to determine how to allocate your money.
It’s imperative to plan early as to where your retirement income is going to come from. To accumulate the amount necessary to fund a sufficient retirement, you need to enroll in your 401K or other defined contribution plan as early as possible and defer as much as possible. It’s also important to periodically increase your contributions and review your investment allocations.
5 Steps to Take to Adequately Prepare for Retirement
Blackrock Chairman Laurence Fink stated, “I do believe the greatest crisis in America will be, not healthcare in the next 10 – 20 years, but the inadequacy of retirement throughout this country.” With employers eliminating or reducing pension plans, this shifts the burden to employees to fund their own retirement. It is crucial to take steps to adequately prepare.
1. Make it a priority to contribute to a 401K at a meaningful level
And periodically increase the contribution rate. Also, take advantage of educational opportunities to be sure investments are allocated properly.
2. Take Advantage of IRAs
In 2014, only 14% of U.S. households who were eligible to make contributions actually did so. For the Roth IRA specifically, only 7% of households contributed, according to the Investment Company Institute. If you are eligible to contribute to a Roth IRA, it could be a great way to add to retirement assets, due to its tax benefits.
3. Once employer-related retirement accounts and IRAs are maxed out, consider opening an investment account and contributing monthly
This type of account has no restrictions as to how or when the money can be accessed but doesn’t have the tax benefits associated with retirement plans or IRAs.
4. Use inheritance money wisely
It is very easy to spend these dollars on a new house, car, trip, etc. However, this could be a nice source of funds to have available for retirement.
5. Have a financial advisor run retirement income projections
This is to see if you will have enough money to enjoy the kind of retirement you would like.
It takes a strong commitment to having a number of assets built up to fund a comfortable retirement. Time is on your side; the earlier you start the longer you have to build up assets and to benefit from compounding.