Talk to your parents or your grandparents, and chances are they can describe a past that would sound entirely alien to you: when companies gave employees lifetime jobs, awarded them generous pensions and covered them with low-cost comprehensive health insurance. And after retirement came the protection of Social Security, a government program that made sure seniors got something back from the federal tax pool they’d paid into all their working lives.
To say those realities have changed would be understatement. Most Millennials will have more jobs before they turn 30 than their grandfather had in his lifetime. And the gold-watch and pension 62? Forget about it. Although some high-tech businesses are restoring the foundation of generous benefits (often supplemented by stock options), it’s not nearly as rosy a picture elsewhere.
To be sure, there’s been one piece of good news. The Bureau of Labor Statistics reported recently that 217,000 jobs were added in May. That means for the first time since January 2008, the U.S. economy is at a point where 138 million people are employed. And while that’s great for young adults entering or exploring possibilities in the job market, one thing’s for certain: Many of those jobs will be nowhere as secure, or offer as rich benefits packages, as those just a few generations ago.
Pensions were great…while they lasted
First, let’s consider pensions. These plans were once widespread; accounts that employers maintained to give you a fixed payout when you retire.
One popular type, the defined pension plan, guaranteed a monthly payout to retired employees regardless of market fluctuations. Such plans are getting as rare than hen’s teeth, though. According to Investment News, only 20 percent of private sector workers are covered by defined pensions, down from about 50 percent 30 years ago. Those stats came from Sen. Tom Harkin (D-Iowa) who chairs the Committee on Health, Education, Labor and Pensions (HELP).
Now, we have to save the difference…and it’s a big one
That means that today, American households face a large gap between what they should have saved for retirement (including pensions) to maintain their standard of living, and what they’ve actually saved.
The non-profit group Retirement USA asked Boston College’s Center for Retirement Research to calculate the numbers, and they came up with the astounding sum of $6.6 trillion.
If there’s one piece of consolation for Millennials, the calculations excluded younger workers who are just beginning to save for retirement. Still, as Jim Poolman likes to say, “It’s not your grandfather’s retirement.”
Poolman serves as Executive Director of Indexed Annuity Leadership Council and is the former North Dakota insurance commissioner. And he believes that the landscape of retirement is changing, not just because of the cutting of pensions, but the threat to Social Security benefits as well. “Social security, for a long time, has not been enough on its own to maintain a quality of life most people want in retirement,” Poolman says. “But even more so, with the nation being in debt, legislators are continually looking at areas that can be cut, and Social Security funds are very near the chopping block.”
Indeed, Social Security’s in big trouble. Lawmakers in Washington D.C. have taken a “kick the can down the road” approach to this problem, and here’s where things stand. “Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.” That statement comes straight from the Social Security Administration website. Based on their estimates, funds for Social Security will run out in 2033, and though incoming taxes could foot some of the bill, it would only be 75 percent—meaning we could see benefits for the Money Under 30 crowd drop by 25 percent from their current levels.
So add it up: Reduced pensions plus the real possibility of a Social Security reduction equals a less secure retirement for you down the road compared to today. “I do believe that millennials entering the workforce now are at serious risk of being completely on their own for retirement savings,” Poolman says, “and so it’s important that they start investing in savings now that will protect them in the future.”
What you can do about it
So if you can’t rely on your employer or the federal government to cover your back, what can you do? Poolman lists these action steps as necessary to ensure that you don’t wind up short of cash when it’s time to retire.
1. Start to plan for the type of retirement you want.
“First, figure out what type of retirement you want,” Poolman says. “Will you travel? Will you stay at home? Will you pursue some lifelong dream or start working down your bucket list? Whatever you decide to do, it costs money. Figure out what you plan to do and save according to that plan.”
And if retirement seems like something that’s so far away you can’t even begin to fathom it, remember that saving for retirement is akin to saving for freedom: freedom from the obligation to work and freedom to spend your time as you choose.
2. Consider the fact that in retirement, your expenses might actually increase.
“People are usually shocked to find that their expenses sometimes increase in the first year of retirement,” Poolman says. “So figure out what bills you have. Will they increase?” If so, build that into your financial plan.
Most people expect that when they retire, they will simplify life a bit and life will cost less. There’s an old adage that you should plan to replace 80 percent of your pre-retirement income after you stop working, but that metric is overly simplistic. Depending on your view of life after work, retirement may actually cost more, especially if your dream retirement involves vacation homes or traveling the world.
3. Balance your portfolio.
“As a young person, you have more flexibility to put your money in some more risky investments,” Poolman says. However, it’s important to balance out your retirement portfolio [as you age] with savings that are guaranteed and risk-adverse.”
Poolman recommends fixed indexed annuities, which offer guaranteed retirement income and grow with the market, but are protected from market volatility. Our take at Money Under 30 is that annuities are a complex instrument that may be suited for some older investors, but not yet. Annuities provide guaranteed returns and reduce risk but are often criticized for high costs and terms that most everyday people don’t understand.
In your 20s and 30s, we recommend a simple portfolio stock and bond mutual funds. As retirement draws closer your strategy will shift from growing your money to protecting it, which is the time to rebalance your portfolio in favor of more conservative holdings.
4. Keep a watchful eye on your portfolio.
“Stay on top of your…statements. As a young person, you have time, but if you wait too long to watch your money, it could be too late to make important actions,” Pollman says.
To be a successful long-term investor, it’s important to learn how to ignore the stock market’s daily ups and downs. While you want your investments on autopilot, you need to check in a few times a year to make sure the autopilot is still on course. Free tools like Personal Capital make it easy to see the overall makeup of your portfolio — even if your money is spread across many accounts — and get recommendations for buying or selling funds to keep yourself diversified.
Freaking out yet? It’s OK, that’s why we’re here. If you’re just getting started, read more about 23 things beginner’s need to know about saving for retirement or take action today and learn how to open your first individual retirement account (IRA).
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