Explore Your Retirement Landscape
The shift from traditional pensions makes you much more responsible for saving enough for retirement.
While most public employees still have pensions, private-sector employers have largely shifted from traditional pensions — defined benefit (DB) plans — to defined contribution (DC) plans, such as 401(k)s,1 over the last quarter century.
How does this transition from DB to DC plans affect your retirement? You may be much more responsible for your retirement than previous generations were. Look at the differences between the two types of plans.
Traditional DB plans generally
- Guarantee a specified monthly benefit for life when you retire.
- Make the employer responsible for decisions about how much to contribute to the plan and how to invest the money.
- Receive federal insurance protection through the federal Pension Benefit Guaranty Corporation (PBGC) if they are private-sector plans.
DC plans generally
- Don't guarantee a specific benefit amount at retirement. Instead, you receive your retirement account balance, which is based on contributions plus investment gains or minus investment losses.
- Transfer the responsibility and risk for retirement savings to you.
- Make you responsible for decisions about contribution amount and types of investments.
- Aren't protected by federal insurance.
Notice key concepts missing from the DC list:
- Guaranteed benefits
- Employer responsibility for investment decisions
- Federal insurance protection
That means DC plans put you in charge of retirement planning, making investment decisions, managing investment risks and making sure you have enough money saved to last your lifetime — all without PBGC protection.
1 In addition to 401(k) plans, DC plans include 403(b) plans, employee stock ownership plans and profit sharing plans.
You're in charge, but you need to take charge by:
- Making retirement planning an ongoing, hands-on, intentional priority from the time you begin working.
- Partnering with a financial advisor to help you avoid investment, planning and tax pitfalls that can sabotage your efforts to save enough for retirement.
Learn more about the PBGC at pbgc.gov.
Living longer means your retirement savings must last longer.
We hope for long lives for ourselves and loved ones. But today's longer life spans are a challenge when you're planning for retirement because your savings have to last longer. Look at these life expectancy numbers over the last century.
|U.S. Life Expectancy Has Increased Since 1940|
|Increase||14.2 years||14.5 years|
Source: 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
Think about the length of your retirement this way:
- A man reaching age 65 in 2010 can expect to live to just over 82, on average.
- A woman turning age 65 in 2010 can expect to live to almost 85, on average.
- About one out of every four 65-year-olds in 2010 will live past age 90, and one out of 10 will live past age 95.1
Get an idea of how long your savings may have to last with the Life Expectancy Calculator.
Your retirement plan needs to outpace inflation to maintain your purchasing power and income.
The inflation rate measures price increases of goods and services and the resulting decrease in purchasing power over time — remember the 8-cent stamp? Although recent inflation rates have been relatively low, the unpredictability of inflation rates makes retirement planning more challenging.
Inflation also affects your income. During retirement, you'll want to replace the income you're earning when you retire, not the income you're earning now. As the graph shows, inflation could have a dramatic effect on income between now and retirement. With an inflation rate of just 4% a year, a retiree earning $50,000 today may need to more than triple his current income of $50,000 to $162,170 to maintain his present standard of living in 30 years.
Factoring inflation into your retirement planning may help your savings last for as long as you live.
Past performance cannot guarantee future results.
Deflate inflation's effect by working with your financial advisor on strategies that may help you hedge against inflation, such as:
- Estimating the effect of inflation on your retirement. Choose an inflation factor that fits the level of risk you're ready to assume in a worst-case scenario.
- Planning for diversified sources of income because some sectors of the economy may do better than others.
- Putting some of your savings into investments that have historically outpaced inflation.
- Investing in a mix of stocks and bonds appropriate for your risk level.
- Creating a diversified investment portfolio appropriate for your risk level.