Most of today's senior citizens enjoy ample financial security-more than generations before and surely more than generations to follow. For that they can thank the three-legged stool, a metaphor describing three sources of retirement income: employer-paid pensions, Social Security, and personal savings. Unfortunately, that stool is slowly collapsing. For those in their 20s, 30s, and 40s today … be prepared. Unless you adequately plan ahead, these changes in the three stool legs may result in retirement vanishing before your eyes:
Leg 1-Defined-Benefit Pensions: Employer-funded pensions are a significant source of income for many of today's retirees. But the fact is, this type of pension has declined markedly over the past 18 years. According to the latest report from the Pension Benefit Guaranty Corporation (www.pbgc.gov), employer-funded pension plans peaked at 114,400 in 1985 and have since declined to a low of about 32,500 in 2002. Because these plans became too expensive to fund and administer, many employers switched from defined-benefit plans to 401(k) plans where employees primarily fund their own pensions. Employers may match their workers' contributions up to a certain limit in these plans, or they may not. That means the pensions of most future retirees will depend on how much they contribute themselves-and few are contributing enough.
In fact, the Investment Company Institute (www.ici.org) reported in March of 2003 that the average 401(k) account balance as of year-end 2001 was only $43,215; older workers generally have higher balances, younger workers lower. While 11 percent of 401(k) accounts have more than $100,000, four times that many accounts have less than $10,000. Sadly, nearly half of American workers in the private sector are not covered by an employer-based plan at all.
Leg 2-Social Security: For years a stable source of retirement income for Americans, Social Security's future is in financial jeopardy. According to the Social Security Administration's 2002 Summary Report (www.ssa.gov), the amount of money coming in through FICA taxes will be less than the benefits being paid out by 2017. In other words, if Congress doesn't do something soon to resolve this upcoming crisis-and don't expect much in the near future because this is a political nightmare-Social Security will be insolvent in 14 years. Expect the program to be around for a long time, but don't expect it to be the same as it is today.
Leg 3-Personal Savings: If more money was being invested in IRAs and other retirement accounts, and/or in other mutual fund accounts (taxable or not), this leg wouldn't be as much of a concern. But that isn't the case. On the contrary, savings are at their lowest level since the Great Depression. According to the Bureau of Economic Analysis (www.bea.doc.gov), the annual personal savings rate peaked at 25.8 percent in the 5-year period 1939-1943 and has declined fairly steadily since. By the mid-1970s it had fallen to 10.5 percent per year and the lowest level in over 60 years (2.7 percent) was seen in 1998-2002. Unless you earn an exceptionally high income, saving a mere 2.7 percent of earnings will not accumulate and compound sufficiently to be a significant source of retirement income.
The bottom line is this: In the future, most American workers will not be able to count on the federal government and their employers to take care of them like they are taking care of today's senior citizens. If you won't have a healthy defined-benefit pension to look forward to (and most workers won't), then the third leg of the stool, personal savings, is going to be critical to your future retirement.
Surveys reveal that most American workers would like to retire by 55! And why not? Consider the advantages: freedom to get up every day and set your own schedule, opportunity to pursue hobbies and favored activities that there aren't enough hours in the day or week for now, unlimited time to spend with family and friends, and a perpetual vacation instead of two or three weeks a year. If that sounds good to you, then it is imperative that you implement effective long-term strategies as soon as possible to turn that dream into reality.
Retirement as we know it today will soon be a memory; those who don't prepare well in advance will not only have to work beyond 55, many will find themselves working into their 70s and 80s just to survive. Working that late in life should be a choice, not a necessity. You can give yourself that choice by building a sufficient net worth to secure that third leg of the stool. Take control of your life now and follow this simple advice: spend less, save more, and invest wisely. The earlier you start, the more you will save and invest, and the faster your money will grow over time. You won't have to work forever if you start planning today. Better yet, you can even give yourself the option of retiring young!
Larry Ferstenou retired over ten years ago at age 42 and is the author of
You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich. More information can be found at www.youcanretireyoung.com.
