Guaranteed pensions are becoming almost a thing of the past, as more and more employers are switching to defined-contribution plans, such as 401(k). Should retirees mourn the shift. Read on to find out…
Are You Worried About Your 401(k)?
A Wall Street Journal article published in January suggests that some of the earliest proponents of 401(k) are now regretting the plan’s current status. Back in the 1980s, they envisioned 401(k) as a means to boost savings and something which should only supplement the traditional defined-benefit system. But over time, more and more employers have ditched the traditional pension altogether in favor of 401(k) for their employees’ retirement. With such a shift in savings plans, retirement savings’ figures are far from encouraging – a 2017 GoBankingRates survey reveals that 39% of respondents have no savings at all.
Compared to 38% in 1979, the share of private sector employees with a traditional pension plan is now down to around 13% (according to a Wall Street Journal report). Employers’ angle in this transition is not hard to guess. Traditional pensions require companies to guarantee pre-determined payouts to support employees’ retirements – something which could be a costly obligation especially with Americans’ rising life expectancies. So, with the advent of 401(k), companies probably deemed it financially less burdensome to let the investments’ market performance determine returns to retirees. But can the shift benefit retirees as well?
A 401(k) plan requires employees to put a certain percentage of their pre-tax pay into the account and that is often matched by their employers’ contribution. Benefits are not pre-determined, so your retirement income hinges on the performance of the investments made from the contributions. Sure, you do not get the ‘certainty’ of defined benefits, but you have more control of where your retirement savings gets invested. That means, you could potentially earn higher returns than you would have under a Defined-benefit scheme. But, it could also go in the opposite direction if you don’t follow the right investing discipline to fulfill your financial goals and/or cushion the market’s downside risks.
Key Takeaway for Investors
Not all individuals have the same retirement goals, and each have their unique financial needs and risk appetites over different time horizons. So, a one-size-fit-all strategy for retirement savings generally does not work. A 401(k) could be only one of the plans contributing to your nest egg. And like any other retirement account, a 401(k) provided by your employer has specific rules/limits on contribution, withdrawal and investment options. Consider all these aspects and ask yourself: is maxing out your 401(k) the best strategy for your financial goals? Or, should you consider other accounts? Is allocating savings across more than one account type suitable for you? How much should you save each year and what kind of financial securities should you invest your savings in?
At Zacks Investment Management, we help our clients get answers to these questions by making a customized analysis of every client’s financial needs. We guide them on a retirement plan or a combination of plans that best suits their individual goals, time horizon and risk tolerance. Our diversification strategies help clients to mitigate downside risks, thereby helping to protect long-term returns. To learn more about our approach download our retirement guide, “Retirement Made Easy.” This briefing has information and tips to help you prepare for a comfortable retirement. To get your free copy, click on the link below: