Apart from working until the day you die, how will you fund your golden years? Read on to find out more.

In the good old days, you joined a company at the age of twenty and stayed until retirement age, all the while paying into the company’s pension plan. You were assured of a safe and comfortable retirement assuming you remained employed with the same company and the company’s shares appreciated over time. When you retired, this tidy pension check would be supplemented by a social security check from the government and would sit by the pool with a smile.

What’s changed?

First and foremost, job security. It is estimated that college graduates now entering the workforce will change jobs eight to ten times during their working lives. Job security and employee loyalty are a thing of the past. Given the high cost of salaries and benefits, employee lay-offs are one of the first actions a company takes at the first sign of an economic downturn. As the company learns to function with fewer employees, hiring new begins only when demand requires it. If you can no longer count on working for the same employer throughout your career, you can no longer count on having a fully vested pension plan to retire with.

What about those pension plans? Even if you manage to remain with the same company for your entire career, you’re still not guaranteed a safe retirement. Just ask former employees of Enron, WorldCom, or even GM.

Even in the healthiest companies, pension plans are becoming a relic of the past. Most companies have replaced their pension plans due as rising funding and management costs cut into their bottom line. To offset these costs, they’ve replaced pension plans with 401-K plans that require employee contributions, with little or no matching funds by the employer and have exported management of these funds to an external management company who allows the employee to allocate the distribution of their money among a variety of mutual funds.

It was assumed that 401-Ks were a win-win proposition for both the employer and employee. From the employer’s perspective, they reduced the cost of benefits paid to each employee by the amount that they were required to contribute to an employee’s 401-K. Through matching funds, the employer’s contribution could and often did decline over time. For instance, an employer matched 401-K contributions dollar for dollar up to the maximum allowed contribution of ten percent of an employee’s annual salary. Over time, they reduced their contribution match down to four percent, thereby reducing their cost per employee. By outsourcing the management of the 401-K to an outside fund manager, the employer not only decreased their management costs, they off-loaded the risk not only to an outside manager, but also to the employee who now had responsibility for choosing how much to invest and how those funds were invested.

Unfortunately, many employees took a hands-off approach to managing their retirement funds, and put all their money in one fund. This strategy meant that during last year’s stock market collapse, many 401-K accounts declined in value by half and employees who’d planned to retire comfortably within a few years had to re-access their plans.

The global economic upheaval highlighted the fact that you can no longer rely on just your company’s pension plan, 401-K.  As for that check from the government: There are the fears that social security will be bankrupt within a decade as a huge wave of Baby Boomers enters retirement age while there are fewer young taxpayers available to fund the government’s obligation through payroll taxes. This disparity has already led the government to raise the age when retirement benefits will become available, it will likely also cause the government to increase taxes overall.

Today’s new reality is that you must take charge of your own retirement.

What can you do?

Be an active participant in planning for your retirement, starting today. Here are some quick tips to get you started on the path to a brighter retirement:

• If your employer offers a 401-K with matching contributions, join and take advantage of every matching dollar.
• Have savings automatically withdrawn from every paycheck so you get used to the discipline of saving and don’t notice the small amount that is withdrawn from each paycheck. Remember, the earlier your start saving the more you will have when you retire.
• Once you’ve begun building your retirement nest egg, leave it alone! Don’t succumb to the temptation to withdraw or borrow from it to fund a present day expense.
• Diversify your retirement assets. Don’t put all your eggs in one investment basket. Depending on your age and appetite for risk, you should spread your retirement dollars among a variety of funds, such as stocks and more conservative bonds, domestic and international investment funds. This will diversify and therefore lower your exposure to a collapse in any one market.

• Pay attention. Become a student of investing. Learn what types of funds are available through your company’s 401-K or pension plan and which ones make the most sense for your retirement plans. Learn about other investments geared toward retirement, such as a Roth IRA. There are a multitude of free resources on the Internet that can help your figure out how much money you will need to retire based on your current age, as well as what options you have to build a retirement plan of your own.

Tags: retirement, Wealth

This entry was posted on Tuesday, April 13th, 2010 at 4:01 am and is filed under Wealth. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.