Living in a Post Pension Retirement World
09 Dec 2015
Investing for retirement has changed over the years. It used to be that people would dedicate 30 or 40 years of their life to a particular company and then get a pension for life that represented much of the pay they had received while working. Certainly in conjunction with Social Security benefits, they would have a very comfortable retirement.
The days of the defined benefit plan are nearly gone. That hasn’t changed because companies are mean. Rather, we should all be rejoicing for the reason: We are living longer. And actuarially, companies cannot put enough money away from a worker’s salary to pay benefits for decades after that person stops working. Social Security and many pension plans were based upon the fact that most people would probably only live a few years after retiring at age 65. As that statistic has changed, more of the onus for retirement security falls on the individual as companies have switched to defined contribution plans.
In a 401(k), as an example, every worker in 2015 has the ability to put away $18,000 per year. In addition, the employer can put additional money into the employer’s side of the 401(k), which then can be matched up to a particular percentage or a threshold. And that threshold is pretty high. The total amount of money that you can put in an employer plan in 2015 is $53,000. Of that, you would contribute $18,000, and you and your employer would put in the balance through matching contributions, etc. If you are 50 or older, you have catch-up provisions in an employer plan allowing you to put away an additional $6,000 per year or $24,000, versus $18,000. In many plans, you can choose whether your plan will be a traditional one or a Roth. In addition, everybody, regardless of income (even Bill Gates), is eligible to contribute to an IRA. However, due to your income you may be limited in your ability to receive a tax deduction for any of your contributions. Please speak to a tax professional regarding your specific situation.
As this element of planning has changed, so have the strategies to effectively maximize your investment. IRA and 401(k) plans can be complex, make sure you are managing yours adequately to prepare for living your ideal life in retirement.