Here’s an email I received a couple of years ago from a reader who’s about my age and was wondering what her retirement was going to look like. Or rather, if she’s even going to have one. I’m reprinting it because it’s a topic I think many can relate to.
Over the past couple of years, I’ve been working to get my financial life in order – but I’m worried it’s too late. I rent an apartment with my 13-year-old son, have no debts, have $4,000 in my emergency fund, and a work 401(k) with $35,000 in it. It doesn’t sound so bad, except that I’m 57 years old. According to my calculations, I’ll have to work until I’m 70 years old and live to 84. Do you have any suggestions or comments?
The first comment I’ll make, Susan, is that you’re in a crowded boat. I’m more or less in the same one, and I’ll bet there are plenty of people reading this who are, too.
How did we get here?
When my father passed away a few years ago, he had been retired for close to 30 years. Despite the fact that he never made more than $50,000 in a single year, he was never short of cash in retirement. Between military and civilian benefits, he was bringing in nearly as much retired as he made working: $45,000 a year. And because he lived a very modest life in a place with a low cost of living (suburban Atlanta), he saved more of his retirement income than he spent.
His son, on the other hand — yours truly — faces a much different future. Having been self-employed for more than 30 years, the only pension I’ll be getting is (hopefully) from Social Security, and the only other income I’ll have is what I can generate from my investments and retirement accounts. Unlike my dad, no one but me is contributing to my retirement. I don’t have a company pension or anyone matching my retirement plan contributions.
I also have another problem: I don’t live in a low-cost area. The property taxes alone on my modest Fort Lauderdale home are 10 times what my father paid; enough to consume about half of my expected income from Social Security.
Of course, I made this bed myself. I chose where I live and what I do for a living. But millions more find themselves in a similar situation because of something they couldn’t control: the replacement of traditional company pensions, known as defined benefit plans, with the retirement plan more prevalent today, defined contribution plans.
Defined benefit pension plans are like Social Security. They guarantee a monthly check (benefit) for life. You can’t outlive the money, and the risk of having enough set aside is the company’s, not the employee’s. In my father’s day, these were common and funded by the employer. Today these plans are rapidly approaching extinction.
According to consulting firm Towers Watson, in 1998, roughly half of employers offered newly hired workers a defined benefit plan. By 2013, only 7 percent did. I have no doubt that number is even smaller today.
The replacement for defined benefit plans, the defined contribution plan, shifts the burden of retirement security to the employee. These plans — think 401(k)s — have no guarantees and are largely funded by you. Result? You contribute as much as you can, then hope the market doesn’t melt down on the eve of your retirement. You’re assuming the risk that your balance will be enough to keep you comfortable for the rest of your life. If it isn’t, it’s your problem, not your company’s.
Shifting the retirement risk from company to employee makes companies more profitable. The downside, however, is that it’s a virtual certainty that more and more Americans will find themselves in the same scary boat that Susan and I share.
What can we do?
While I do have more saved than Susan, depending on what happens, it still might not be enough. For example, if interest rates stay this low, generating an adequate income (at least safely) from my retirement savings will be tough. That leaves me with one or a combination of these choices:
- Radically reduce my cost of living when I retire, perhaps by moving to a lower-cost home here in Florida or somewhere else.
- Accumulate as much as possible now, then pray for considerably higher interest rates on low-risk accounts by the time I retire.
- Keep working past traditional retirement age.
- Supplement my retirement income by spending my principal, then hope I’m dead before it is.
- Take a measured amount of risk with my retirement savings to create more.
These are my choices, and Susan’s as well. And what she and I will do is probably a combination of all of them.
All of us — Susan, you and me — need to put as much money aside as we possibly can. How?