The traditional defined-benefit pension plan was a key component of many Americans' compensation packages until the 1980s. Employees could be confident that the combination of pension and Social Security benefits could adequately see them through their golden years. Except for certain public sector professions, such as police, firefighters and teachers, for most employees, pensions have gone the way of the typewriter.
Retirement is no longer about reaching an arbitrary age and calling it quits. It's about retiring once you're financially prepared for the years ahead. To retire without the fear of running out of money, younger workers need to actively consider their retirement savings plans for decades leading up to retirement.
Most Americans put some funds aside in pre-tax accounts and should be inclined to do so early on in their respective careers, even if that means delaying the instant gratification of an indulgent lifestyle. Concerns about the future solvency of our Social Security system will leave future retirees far more reliant on their own savings.
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Social Security and the National Debt Tsunami
Entitlement reform has been looming behind the political curtain for decades. However, it’s not an easy or pleasant endeavor because it entails raising taxes, reducing benefits or altering the retirement age. Those topics are not politically popular concepts to address. However, as the 2019 annual Social Security board of trustees report shows, we’re running out of time.
Under current Social Security Administration projections, the program's costs will exceed its income by 2020 and the Social Security Trust Fund is estimated to run dry by 2035. Without changes to the current system, benefits may be cut by at least 25%. The national debt, currently at $22 trillion and climbing, exacerbates the situation. At some point, the government must start repaying this debt, which threatens to force a cut in Social Security benefits far more significant than 25%.
Despite millions of Americans paying into the Social Security system for decades to support past generations, the government is not required by law to keep benefits at a particular level or even continue the program. So, the critical question becomes: Where will retirement income for future generations, such as millennials, come from?
Proactivity Defeats Reactivity - Growth Is Key
The harsh modern-day reality is that if you do not take a proactive approach to retirement planning and allocate it properly for growth, you could be faced with the proposition of working well into your 80s or relying on your children for financial support. For those looking to avoid these situations, proper retirement planning can provide a viable path to financial stability and independence.
Best practice dictates starting retirement planning as soon as possible, ideally at your first job. Tax-deferred growth and employer matching contributions combine to create a powerful way for younger generations to accumulate retirement assets.
There is no one-size-fits-all solution to creating a secure retirement. There are many considerations, and if you’re struggling to get started or feel overwhelmed, the best course of action may be to engage the assistance of a CERTIFIED FINANCIAL PLANNER™ (CFP®) who is experienced in customizing advice tailored to your distinct needs and goals.
For example, many families need to balance retirement planning with the challenge of funding their children's college. Considering the current cost of a university education, retirement savings may need to be temporarily reduced in order to prioritize this expense. However, it should never be put entirely on pause. Those who wait until their children are through college will forgo the benefit of compounded returns, which can be responsible for a significant portion of your assets in retirement.
It's also vital to set realistic expectations for retirement account withdrawals. Most advisers use the 4% rule — which says you should be able to withdraw 4% of your portfolio value each year in retirement — to help preserve retirement account values and guard against clients running out of money later in life.
With people living longer, individuals need to be mindful of both growing retirement assets during their careers and how they spend those funds in retirement, which could last for 30 years or more. And while it may be tempting to access funds via 401(k) loans prior to retirement, there can be significant ramifications in doing so. The importance of maintaining a disciplined approach to retirement cannot be underestimated.
Millennials Must Prepare
In the current environment of mounting student loan debt, millennials in particular are not getting exposure to the world of investments and retirement planning as early as past generations. As such, millennials have gained a reputation for a risk-averse attitude toward investing. Moreover, with a preference toward more short-term employment opportunities, many millennials also tend to lack the stable income needed to even consider investing. As a result, many have little or no retirement savings. In fact, almost 50% of millennials do not have a retirement account.
That can be a costly mistake, because millennials are at an age to gain a significant advantage from tax-deferred growth and compounded returns. Waiting to save negates the effectiveness of these benefits and can leave millennials with a significant shortfall in retirement. This, combined with the anticipated cuts to Social Security and the elimination of defined benefit pensions, may signal a future recipe for disaster.
Even if you start small, it’s important to take a proactive approach to saving and investing for retirement. What may seem like a small sum today can be positioned for significant future growth with proper investment management and years of compounded returns.
Working with an experienced CFP® can help younger generations combat changes to future Social Security benefits. Although Social Security will most likely still provide some retirement income in the future, inevitable cuts threaten to leave millions of Americans underprepared. While the situation may seem daunting and does require some initial sacrifice, implementing a disciplined and consistent retirement plan strategy early in one’s career will greatly improve the prospects for enjoying a stable retirement later in life.
Securities offered through Kalos Capital Inc., and investment advisory services offered through Kalos Management Inc., ("Kalos") both at 11525 Park Woods Circle, Alpharetta, GA 30005. Caliber Financial Partners LLC, is not an affiliate or subsidiary of Kalos. Member FINRA/SIPC.
The opinions in the preceding commentary are as of the date of publication and are subject to change. Information has been obtained from third-party sources we consider reliable, but we do not guarantee the facts cited are accurate or complete. This material is not intended to be relied upon as a forecast or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should consult their financial adviser on the strategy best for them. Past performance is no guarantee of future results. Kalos Capital Inc. does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal adviser for such guidance.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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