Retirement Planning: Why Plan For Retirement?
Before we begin discussing how to plan a successful retirement, we need to understand why we need to take our retirement into our own hands in the first place. This may seem like a trivial question, but you might be surprised to learn that the key components of retirement planning run contrary to popular belief about the best way to save for the future. Further, proper implementation of those key components is essential in guaranteeing a financially secure retirement. This involves looking at each possible source of retirement income.
Uncertainty of Social Security and Pension BenefitsFirst off, we need to be up front about the prospects of government-sponsored retirement - they're not very good. As we all know, the developed world's populations are continuing to age, with fewer and fewer working-age people remaining to contribute to social security systems.
For instance, consider that according to a 2005 study by Stephen C. Goss, chief actuary of the Social Security Administration, the ratio of covered workers versus the number of beneficiaries under the U.S. Social Security program has been reduced significantly over the years. In 1940, there were 35.3 million workers paying into the system, with only 222,000 beneficiaries - a ratio of 159 to 1. In 2003, the number of workers increased to 154.3 million, with 46.8 million beneficiaries - a ratio of 3.3 to 1. (For related reading, see Introduction To Social Security and The Generation Gap.)
Uncertainty of Social Security and Pension BenefitsFirst off, we need to be up front about the prospects of government-sponsored retirement - they're not very good. As we all know, the developed world's populations are continuing to age, with fewer and fewer working-age people remaining to contribute to social security systems.
For instance, consider that according to a 2005 study by Stephen C. Goss, chief actuary of the Social Security Administration, the ratio of covered workers versus the number of beneficiaries under the U.S. Social Security program has been reduced significantly over the years. In 1940, there were 35.3 million workers paying into the system, with only 222,000 beneficiaries - a ratio of 159 to 1. In 2003, the number of workers increased to 154.3 million, with 46.8 million beneficiaries - a ratio of 3.3 to 1. (For related reading, see Introduction To Social Security and The Generation Gap.)
A similar pattern exists with other pension systems, including those in many European nations. At the same time, greater and greater burdens are being placed on the system, as more and more people retire and, due to advances in health care, are living longer than ever before.
This "double-whammy" effect holds the potential to put significant strains on the system and could leave governments with no other viable option but to reduce social security benefits or suspend them altogether for all but the poorest of the poor.
Private pension plans aren't immune to shortcomings either. Corporate collapses, such as the high-profile bankruptcy of Enron at the turn of the century, can result in your employer-sponsored stock holdings being wiped out in the blink of an eye. (To learn more about how this happens, read What Enron Taught Us About Retirement Plans.)
Defined-benefit pension plans, which are supposed to guarantee participants a specified monthly pension for the duration of their retirement years, actually do fail every now and again, sometimes requiring increased contributions from plan sponsors, benefit reductions, or both, in order to keep operating. (For more on this topic, check out The Demise Of The Defined-Benefit Plan.)
In addition, many employers who used to offer defined-benefit plans are now shifting to defined-contribution plans because of the increased liability and expenses that are associated with defined-benefit plans, thus increasing the uncertainty of a financially secure retirement for many.
These uncertainties have transferred the financing of retirement from employers and the government to individuals, leaving them with no choice but to take their retirement planning into their own hands.
Unforeseen Medical ExpensesWhile the failure of a social security system may not occur, planning your retirement on funds you don't control is certainly not the best option. Even with that risk aside, it's important to realize that social security benefits will never provide you with a financially adequate retirement. By definition, social security programs are intended to provide a basic safety net - a bare minimum standard of living for your old age.
This "double-whammy" effect holds the potential to put significant strains on the system and could leave governments with no other viable option but to reduce social security benefits or suspend them altogether for all but the poorest of the poor.
Private pension plans aren't immune to shortcomings either. Corporate collapses, such as the high-profile bankruptcy of Enron at the turn of the century, can result in your employer-sponsored stock holdings being wiped out in the blink of an eye. (To learn more about how this happens, read What Enron Taught Us About Retirement Plans.)
Defined-benefit pension plans, which are supposed to guarantee participants a specified monthly pension for the duration of their retirement years, actually do fail every now and again, sometimes requiring increased contributions from plan sponsors, benefit reductions, or both, in order to keep operating. (For more on this topic, check out The Demise Of The Defined-Benefit Plan.)
In addition, many employers who used to offer defined-benefit plans are now shifting to defined-contribution plans because of the increased liability and expenses that are associated with defined-benefit plans, thus increasing the uncertainty of a financially secure retirement for many.
These uncertainties have transferred the financing of retirement from employers and the government to individuals, leaving them with no choice but to take their retirement planning into their own hands.
Unforeseen Medical ExpensesWhile the failure of a social security system may not occur, planning your retirement on funds you don't control is certainly not the best option. Even with that risk aside, it's important to realize that social security benefits will never provide you with a financially adequate retirement. By definition, social security programs are intended to provide a basic safety net - a bare minimum standard of living for your old age.
Without your own savings to add to the mix, you'll find it difficult, if not impossible, to enjoy much beyond the minimum standard of living social security provides. This situation can quickly become alarming if your health takes a turn for the worse.
Old age typically brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear - especially if your health (or that of your loved ones) starts to deteriorate. As such, to prevent any unforeseen illness from wiping out your retirement savings, you may want to consider obtaining insurance, such as medical and long-term care insurance (LTC), to finance any health care needs that may arise. (To learn more about providing for your medical expenses, read Medicaid Versus LTC Insurance, The Evolution Of LTC-Insurance Plans, Long-Term Care: More Than Just A Nursing Home and A New Approach To Long-Term Care Insurance.)
Estate PlanningSwitching to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.
Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age. (For more insight, read The Importance Of Estate And Contingency Planning.)
The Flexibility to Deal With ChangesAs we know, life tends to throw us a curve ball every now and then. Unforeseen illnesses, the financial needs of your dependents and the uncertainty of social security and pension systems are but a few of the factors at play.
Old age typically brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear - especially if your health (or that of your loved ones) starts to deteriorate. As such, to prevent any unforeseen illness from wiping out your retirement savings, you may want to consider obtaining insurance, such as medical and long-term care insurance (LTC), to finance any health care needs that may arise. (To learn more about providing for your medical expenses, read Medicaid Versus LTC Insurance, The Evolution Of LTC-Insurance Plans, Long-Term Care: More Than Just A Nursing Home and A New Approach To Long-Term Care Insurance.)
Estate PlanningSwitching to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.
Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age. (For more insight, read The Importance Of Estate And Contingency Planning.)
The Flexibility to Deal With ChangesAs we know, life tends to throw us a curve ball every now and then. Unforeseen illnesses, the financial needs of your dependents and the uncertainty of social security and pension systems are but a few of the factors at play.
Regardless of the challenges faced throughout your life, a secure nest egg will do wonders for helping you cope. Financial hiccups can be smoothed out over the long term, provided that they don't derail your financial plan in the short term, and there is much to be said for the peace of mind that a sizable nest egg can provide.
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