If you were born between the mid 1940s and the mid 1960s, you\u2019ve been labeled a \u201cbaby boomer\u201d by economists and population researchers.\u00a0 Setting aside all the predictable jokes, there are some things that make you and your fellow \u201cboomers\u201d unique.<\/p>\n
One of those is that planning for a secure retirement will be much different than it was for the generation that preceded you.\u00a0 For a variety of reasons \u2013 some of which we\u2019ll explore here \u2013 the security of your financial future is really up to you.<\/p>\n
Let\u2019s look at some of the challenges you may face when planning for a secure retirement, and some of the potential solutions.<\/p>\n
If you\u2019re over the age of 40, and one or both of your parents worked in this country, chances are they retired with a company-provided defined benefit pension.\u00a0 A traditional defined benefit pension pays retired workers a (defined) percentage of their last salary for life, and those payments are typically adjusted for inflation each year. These defined benefit pension plans played a major role in the creation of the American middle class after World War II.<\/p>\n
By the mid 1970s, though, American companies discovered that their funding obligations for these pension plans were very significant.\u00a0 Retired workers were living longer, and so the companies\u2019 financial commitments to those retirees were growing.\u00a0 Eager to be free of these obligations, thousands of employers decided to freeze or terminate their pension plans, and in their place adopted defined contribution plans, like the well-known 401(k) plan.<\/p>\n
With a defined benefit pension plan, the employer is on the hook for ensuring that the beneficiary receives their promised payments.\u00a0 In contrast, a defined contribution plan merely sets out how much can be contributed to the plan by the employer and the employee, but the value of the account at retirement<\/a><\/strong><\/span>, and therefore also the stream of income, is by definition unknown.\u00a0 Companies succeeded in transferring the risk of generating a stable source of income for retirement to their employees.\u00a0 Today, it is mainly the public sector \u2013 teachers, public safety workers, and government employees \u2013 that still enjoys defined benefit pension plans, with the private sector largely dependent on defined contribution plans for retirement.<\/p>\n Since you\u2019re most likely one of the millions of Americans responsible for their own retirement savings<\/a><\/strong><\/span>, it\u2019s crucial that you understand the elements of investing<\/strong><\/a>, how to design an appropriate investment mix<\/a><\/strong><\/span>, and how your employer\u2019s plan works.<\/p>\n If your employer\u2019s plan offers matching contributions, you\u2019ll want to make sure that you contribute at least enough yourself to receive the full match \u2013 after all, it\u2019s literally free money.<\/p>\n If you\u2019re unsure about, or overwhelmed by, the plan\u2019s investment menu, you should reach out to the plan\u2019s advisor for guidance.\u00a0 If the plan doesn\u2019t have an advisor, or the information available is too general, you should strongly consider hiring your own financial advisor to help you.\u00a0 Making smart choices about the investments in your employer-sponsored plan will play a major role in setting you up for a secure retirement.<\/p>\n There are many variables that can affect your ability to plan for a secure retirement \u2013 future investment returns, inflation for your core living expenses and for health care costs, tax rates, and how long you\u2019ll live, to name just a few.<\/p>\n If you\u2019re uncertain how these may impact your plans, you should consider working with an independent, fee-only advisor. You can find an experienced, fiduciary advisor to interview in a variety of places, including the websites for the CFP Board<\/strong><\/span><\/a>, the Financial Planning Association<\/strong><\/span><\/a>, and the National Association of Personal Financial Advisors<\/strong><\/span><\/a>.<\/p>\n An advisor will be able to build a robust financial plan for you that includes all of your goals \u2013 like retirement, health care costs, travel, charitable giving, and perhaps college for your grandkids or a vacation home \u2013 while showing you how changes in those variables affect your plan\u2019s success rate. At Springwater, we refer to that as \u201cstress testing\u201d your plan.<\/p>\n <\/p>\n Social Security is a program that provides millions of Americans with economic security. While the media periodically draws attention to the fact that, by design, the program periodically faces funding challenges, it\u2019s safe to assume that Social Security will be there for you, and that it will play an important role in your secure retirement.<\/p>\n In a nutshell, the program pays you a percentage of your pre-retirement income, that\u2019s based on your lifetime earnings. On average, Social Security beneficiaries receive about 40% of their pre-retirement income.\u00a0 But, the higher your earnings were during your working years, the lower that percentage will be. This is because Social Security uses a wage base limit, which both caps the amount that you pay into the system each year through payroll taxes, and also limits the maximum benefit you can receive.\u00a0 The wage base limit is set annually, and is adjusted for changes in the average wage index.\u00a0 The objective is to ensure that the wage base limit keeps up with wage growth.<\/p>\n Your Social Security<\/a><\/strong><\/span> benefit amount is based on a formula that takes into account your earnings in the 35 years when you earned the most.\u00a0 But if you earned more than the wage base limit, those additional earnings aren\u2019t counted in determining your benefit.\u00a0 If the limit wasn\u2019t applied, a person who earned millions of dollars a year during their working career would potentially receive tens of thousands of dollars per month in Social Security benefits at retirement.<\/p>\n The Social Security system is a \u201cpay as you go\u201d program.\u00a0 This means that current workers pay into the system via payroll taxes, and their contributions are used to pay benefits to current retirees.\u00a0 When there are more active workers paying into the system than there are retirees drawing benefits, the system generates a surplus (i.e. more taxes paid in than benefits paid out). But when the ratio of workers to retirees shifts, the program generates deficits. Each year the Social Security Administration publishes a report<\/a><\/strong><\/span> that projects when these deficits \u2013 attributable to the growing number of retirees relative to active workers \u2013 will eliminate the surplus.<\/p>\nWork with an Advisor<\/h2>\n
Have retirement concerns? Contact us today to see how our team at Springwater Wealth can help you develop a plan for your financial peace of mind.<\/a><\/strong><\/span><\/h2>\n
Know the Facts on Social Security<\/h2>\n