As a financial planner to individuals and couples in their 30s, one conversation that rarely comes up is how much of a pension is expected in retirement. The answer is almost always none. There are, however, a fortunate few that do have access to a pension plan (namely government employees).

Over the past 30 years or so, since the introduction of the 401(k) retirement plan, American businesses have slowly done away with maintaining a pension plan for their employees. This has shifted the retirement income risk off the employer (pension) and onto the employee (401(k)).

Unfortunately, this has come with considerable consequences. Defined benefit pension plans provided a consistent and reliable stream of income for employees that spent their career alongside their employer. The 401(k) plan has put the savings requirement and investment knowledge on the employees, which has provided less than desirable results.

For individuals born in the 1920s to 1940s, the combination of Social Security and pension income provided for a fruitful retirement.

The lack of a pension has contributed to the ever growing gap in wealth between generations. In the period from 1989 to 2013, the median inflation-adjusted wealth by someone 62 years or older has grown by 40 percent. Over the same time period, the middle-aged group (40-61 years old) has seen their net worth decreased by 31 percent. For families aged 40 and younger, net worths have decreased by 28 percent.

Having said this, we can choose one of two options: complain about our unfortunate employee benefit circumstances, or start to take action. I prefer to take action.

A primary goal for working individuals with a 401(k) or similar retirement plan should be to maximize your contribution each year. In 2017, you are able to contribute a maximum of $18,000 (for individuals under 50 years old). Even if you are 30 years old with zero savings, this will add up to a considerable sum by the time you reach retirement age. Doing the math, $18,000 contributed every year for the next 35 years, growing at an inflation-adjusted 7%, will turn into almost $2.5 million. And if you believe in The 4% Rule like I do, this could conservatively provide $100,000 per year of income (in today’s dollars!).

Now, imagine you are able to begin maximizing your 401(k) today. The scenario above does not even factor the opportunity for increased savings in the years to come, as your income grows. Furthermore, these numbers are only for one individual. For couples, you can double the savings to have double the impact.

By maximizing your retirement contributions, you are controlling your future. No, we may not have a pension to fall back on, but we do still have the opportunity to save and live on our own terms. Struggling to find enough room in your budget to maximize your retirement contributions? Find ways to increase your income, either at your work by earning a raise, taking on a new role, or earning income on the side.

As the St. Louis Fed mentioned in their recent report -

“it is important for younger generations to robustly manage their balance sheets to accumulate wealth and build financial stability. This is best accomplished by assembling a diversified portfolio of assets, saving regularly, maintaining an emergency fund and keeping debt to a minimum”

Source: Even Wider Generational Wealth Gap


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