A lot of retirees have not saved enough for retirement. Are you one of them?
You may not realize you have something in common with the city of Detroit. And I really hope you don’t have this trait in common. But for too many retirees it is true.
They haven’t saved enough for retirement. In other words, their qualified retirement plans are underfunded.
What is happening in Detroit right now is actually a warning to current retirement savers, such as yourself. The city of Detroit is in bankruptcy. Therefore, they are having to reach deals settled in a court of law of how they will reduce pension benefits to their current retirees, as well as their future retirees.
The broken promises that cities have made to their former employees is a topic I keep coming back to. I have actually been working with a handful of retirees from the city of Memphis. They have had some of their retirement benefits cut back too.
The problem is that many cities across America have over-promised retirement benefits to their employees. Then when the employees retired the cities found out they may not be able to deliver on those promises. Result: reduced retirement benefits, such as pensions.
And these are real people’s lives. They were counting on the checks to cover them in retirement. But the facts remain, many cities across America do not have the funds to pay out the benefits they promised.
Normally I’d use this as an opportunity to stress the importance of the SOURCE of your retirement income. Some sources, such as the a city of Detroit pension, may not be the most reliable.
But today I want to bring attention to the fact that what is happening in Detroit is similar to what many individuals face that are saving for retirement: they are not putting enough back in savings and they are hoping for portfolio growth to save them.
Retirement Planning Done Wrong
The city of Detroit just reached an agreement with its existing pensioners that reduced their benefits. And the retirees are given no guarantees that benefits won’t be reduced further in the future.
The pension managers are hoping to get 6.75% average annualized growth on the pension’s portfolio over the next 10 years. If they can do that they believe they may not have to reduce benefits any further.
But this may be difficult for them to achieve that rate of growth. And if they don’t grow the portfolio enough the city of Detroit will have two options:
- Raise taxes or
- Reduce benefits further at a later date.
So the city of Detroit is really hoping that market returns will save the day. And that brings us to the individual investor… maybe even someone in your situation.
If you do not have access to a pension through your employer, then it is all the more important for you to save for retirement through a qualified account like a 401(k), 403(b), or a personal IRA or Roth IRA.
But a lot of retirees, who may be taking advantage of these retirement savings vehicles, may not be putting enough savings into them. In other words, they may wind up like the city of Detroit which did not set enough aside to cover the expenses of paying retirees income for life.
Individuals really have 2 options (just like the city of Detroit). They can
- Put more savings into their retirement vehicles (which is like the city of Detroit trying to raise taxes to put more funds in its retirement pension program)
- Or, they can plan on spending less in retirement (which is like the city of Detroit reducing pension benefits to its retirees)
If you don’t put aside enough savings for your retirement, then you really have to hope that your portfolio will grow enough to make up the difference. In other words, you will have to put too much hope in the market making up for your lack of savings.
But what happens if the market doesn’t give you the returns you need? Well, you get back to those same two choices listed above: 1) increase your savings while you are working or 2) plan on reducing your spending in retirement.
How To Not Be Like Detroit
You don’t have to wait for a city committee or a court hearing to decide the fate of your retirement. If you want to help put yourself in a better position for retirement you can take steps now to do so.
- Start putting 10% of your earnings into savings for retirement
- If the kids have moved out and you’ve paid off the mortgage, try increasing it to 15%
- Take advantage of tax deferred retirement savings accounts like your 401(k) or IRA
- Be sure to get the company match from your employer on your 401(k)
You can begin taking steps now to give yourself a better retirement.
To read the full article on this topic visit: http://time.com/money/3582218/retirement-detroit-pension-savers-warning/
In your service
P.S. – Saving enough for retirement is a huge issue. But another huge issue you will probably face in your retirement planning is the issue of annuities. They are typically sold to people near retirement age. Before you make an annuity purchase, be sure to check out the eBook “How To Avoid Annuity Traps.” It will help you make a better decision if you decide an annuity is right for you.