For most people under 50 the concept of retirement is difficult to imagine, let alone plan for. TV commercials with grey haired people sitting on a beach don’t help the cause. How do you plan for something that is so far away?
However, by starting with great financial habits (like saving & investing) you can buy options in life. And over time, those options will evolve, and can include a comfortable retirement if that’s what you choose.
So how do you start? Let’s look at a couple of ways. The old-school way to save for retirement is through what are called defined benefit plans. These are things like pensions, where you and your employer contribute to the plan over your working life, and when you retire, you get a defined dollar amount until you die. Social security also works this way. They are terrific vehicles for retirement because you know exactly how much you will make when you retire. You are also insulated from things that are out of your control, like economic downturns. And you get paid even if you live a very long time.
But a funny thing happened about 30 years ago. Defined benefit plans ran into trouble. And it wasn’t anything these plans did. The problem was that there was risk to these plans, and that risk burden lay with the people who put the plans together: companies. So when a parent company ran into financial trouble, or the economy hit the skids, companies began to struggle to manage their pension plans. Plans fell out of favor as companies screamed about the burden they had to carry.
But pensions themselves are great. CalPERS (the California Public Employees’ Retirement System) is one of the strongest, best managed, most active leaders in the finance industry. They manage $300 billion in assets and pay out $12 billion in retirement benefits each year. Their pension is funded, solid and ensures 1.6 million Californians have retirement security. Pensions can work, and work well if they are managed by skilled professionals.
But poorly managed companies threw pensions under the bus. They didn’t want the burden of risk that came from managing pensions. So they looked for alternatives.
And they found 401Ks. Originally conceived as a tax break on deferred income, 401Ks were never meant to be used as a retirement plan. But in 1980, a benefit consultant named Ted Benna used it as a retirement plan for the company he worked for. Suddenly, Bam! Companies found a replacement for their pensions: 401Ks.
Companies loved the plans because it allowed them to dump their risk onto their employees. Under the title defined contribution plans, employees not only had to fund the accounts themselves (with some help from their companies through matching), but they had to manage the plans themselves or have a third party manage it for them (for a fee). Defined contribution plans have grown to include new vehicles such as IRAs.
But the change has meant that retirees now have to shoulder all of the risks that pensions shielded them from. So if the market turns down, or you get bad advice, or if you live a long life, you may not have enough saved to retire comfortably.
But that’s okay, right? Individual Americans are doing a great job saving in these 401Ks and IRAs, yes? Well. No. According to the Economic Policy Institute, only half of Americans have any retirement savings at all. And the average American has only $5,000 in retirement savings.
But it does work, for some people. If you have lots of money, 401Ks and IRAs are fantastic. The average savings in these plans is actually $95,776, which means that while most Americans have little or no retirement savings, there are a few people who have a huge amount of money in their retirement savings plans.
In the meantime, pensions have fallen out of favor. Only 32 percent of families have someone at home with a defined benefit plan. It also means that a huge number of Americans will be depending on Social Security (so be careful of politicians who talk about “fixing” Social Security).
So this is the world we live in. Most employees now bear the risk of saving for retirement.
This is exactly why GoldBean exists.
At GoldBean we believe that with the right tools and education, everyone can be confident with their money. GoldBean is built to help you to get your money muscles working, so that saving and investing become a clear and easy part of your life. You use what you know, and learn as you go, to become an empowered investor.
Here’s some quick advice that we give to people who want to know what to do:
Take advantage of your company’s 401K and contribute enough to get the maximum company match. If your company doesn’t contribute, a 401K loses much of its benefit. It will still lower your taxable income, but you won’t get the long-term benefit from your company’s extra cash.
If you don’t have a 401K (or even if you do and have extra savings)– look at setting up an IRA (a tax advantaged Individual Retirement Account). Get a ROTH IRA if you qualify. Most brokers offer them (including our preferred broker TradeKing). Try to deposit the maximum limit of you can each year. These accounts will allow you to invest tax free or to defer taxes until you retire.
If you have an IRA, make sure the funds are invested and not sitting in cash. The easiest way to do this is to buy a super-low cost ETFs (Exchange Traded Funds) that track the overall market. $SPY and $IVV are the best known, lowest cost examples of these funds.
Think about your financial life in totality and how you prioritize your short-term wants (a shiny new car) vs your long-term needs.
At GoldBean we believe that every person can be a good investor and can reduce the risk they face saving for the future. And we believe that by empowering yourself, you can plan, build and save for the future.