Retirement has always been a solo mission

January 8, 2019

Many people long for the past, when pensions were the norm and employers took care of retired employees in exchange for their years of dedicated service.

Those days are largely gone.

Yes, pensions — or defined benefit plans — still exist. But for most folks today, retirement income is an individual effort.

One reason is because people change jobs much more than in the past. Working an entire career at one company is a modern rarity.

The bigger reason, however, is the prevalence of 401(k) plans in the workplace.

Humble Start, Giant Today

The 401(k), also known as a defined contribution plan, started in 1978 as relatively few lines of text in an otherwise robust set of laws.

The intent was to put limits on executive compensation. Obviously, they’re used for an entirely different purpose now — primarily as a tax-efficient way to contribute to retirement.

While the start of the 401(k) was humble, these plans are huge now. Nearly 60 million Americans participate in 401(k) plans, and across the board, they contain more than $5 trillion dollars in holdings.

Shifting Burden and Risk

From an employer perspective, the move to 401(k) plans ushered in a welcome shift of both financial burden and associated risk.

Use of the defined benefit plan (pension) means employers are on the hook to provide a “defined benefit.” That usually is a stream of income based on earnings throughout an employee’s career with the company. To achieve this end, pension funds invest their assets, and seek to grow them to a size that can deliver the promised benefits.

Of course, such an undertaking is fraught with risk. What if the investments don’t pan out? What happens if people live longer than anticipated? What if the business suffers? And so on.

In a defined contribution plan like a 401(k), employers are on the hook for a “defined contribution,” which is often a company match on employee contributions.

Many times, plans are structured so a match is contingent on company performance, and at the end of the day, voluntary in nature. Bad year? Sorry, no match. On top of that, the worries of market performance and longevity fall exclusively on employees.

The “Pensions for All” Myth

It’s no surprise people long for the pension days of yore — the “good old days,” if you will.

That’s when “everyone” had a pension. Back then, employers shouldered the burdens and risks, and workers didn’t have to worry about retirement income.

But according to the Congressional Research Service, the largest portion of the age-65-and-up population to ever receive pension income was 38 percent, back in the early 1990s. It was lower before then, and the most recent data suggest it’s about 34 percent.

Clearly, not “everyone” had pensions. And of those who did and still do, pension income often makes up only about 20 percent of total retirement income.

That’s hardly enough to be worry-free.

So, the “good old days” of pension abundance are largely tales of revisionist history. Perhaps because many well-known firms offered pensions, people assume all employees everywhere had them.

The Truth is Solitary

The reality is, retirement income has always been a solo mission.

That continues to be true today, as fewer organizations offer pensions. And what’s worse, many of the existing pension funds — even huge ones — are drastically underfunded, putting more onus on individual savings.

For instance, state pension funds in Kentucky, Illinois and Pennsylvania, to name a few, are scrambling. They and others have multi-billion-dollar gaps between current assets and future obligations.

That means many pensioners will receive less than what they were promised, which is exactly why it’s so important to have your own plan for income in retirement.

Relying on others can work to an extent. But as the Congressional report indicates, individuals have always been responsible for their own retirements, so it literally pays to have a plan.

That’s truer now than ever before. And it won’t be changing any time soon.

It begs the question — what’s the state of your retirement plan?

Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at eliteretirementstrategies.com or by calling 208-252-4345.

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