Where Did Pensions Go?

A generation ago, many people had jobs that offered pensions after working for around thirty years with a company. These pensions, along with Social Security, provided economic security in retirement. But today, pensions are a rarity.

In my opinion, there are two main reasons why pensions have faded away.

The Cost of Pensions

The biggest factor is economics. Pensions are a cost, and companies are always assessing whether that cost adds value for their customers. Many companies have decided that pensions are no longer necessary to deliver value in today’s marketplace. While this shift may not be popular, it’s driven by the bottom line—companies are cutting back on offering pensions to remain competitive.

Fewer Long-term Relationships between People and Companies

Another key reason is the changing nature of employment. In the past, it was common for people to stay with a single employer throughout their career, and pensions were part of the reward for long-term loyalty. However, today, fewer people stay with one company for their entire working lives. Some argue this is a chicken-and-egg situation: do fewer people stay because pensions are gone, or are pensions gone because fewer people stay? Either way, the result is the same—a decline in pensions.

Rolling Your Own

Hopefully you will excuse me having a little fun with the “roll your own” metaphor. Those who know me know I abhor cigarettes and have never even thought about touching illegal substances. Still, the metaphor works in this case.

With pensions gone, it is incumbent upon individuals to take responsibility for their financial future. Key to this is putting in place a plan to provide income in retirement. Perhaps the most effective, and most commonly available tool to support this endeavor is the 401(k) plan. These plans were started back in 1978 when a new section was added to the Internal Revenue Code.

Since that time, they have grown massively and now house close to $4.0 TRILLION dollars in assets according to the research I did prior to writing this post. That is a lot of dollars! For the remainder of this article, I am going to assume the reader has access to a 401(k) or some sort of similar investment alternative.

Defer Now and Draw Later

A traditional 401(k) allows you to defer income from taxes now and withdraw it during retirement. Whether you choose a pre-tax (traditional) or after-tax (Roth) 401(k), the key is deferring part of your income today so you can draw from it later. Essentially, you’re “funding your own pension,” much like companies used to do on your behalf.

If companies are no longer offering pensions, it’s up to you to take control of your financial future.

How Much to Save and How to Invest

Disclaimer: Unless I’m your advisor, you should NOT rely on my advice alone. What follows are general thoughts for you to discuss with a financial professional.

The question of how much to save is complex. It depends on your current spending, tax rates, expected rates of return, time to retirement, and how long you’ll need income in retirement.

As a rule of thumb, I recommend aiming to save 20% of your income. Here’s why:

1. Social Security and Medicare – Deduct about 8% (technically 7.65%) from your income for these.
2. Taxes – Assume around 24% for taxes.
3. Mortgage – Deduct 28%, which is what banks typically approve for housing costs. The assumption is that you’ll retire your mortgage by retirement.

These three deductions leave you with about 40% of your gross income. I suggest setting aside half of that for retirement—meaning, you save 20% of your income each year. In essence, for every year you work, you fund one year of retirement.

Investment Strategy

Again, unless I’m your advisor, don’t take my recommendations as specific guidance. However, I generally encourage people to use a diversified, non-active (index or factor-based funds), low-cost portfolio of mutual funds. While returns can vary, the S&P 500 index has historically returned around 8% over the long term, but there are no guarantees.

A diversified portfolio can help you outpace inflation, which is crucial for long-term financial security. If your investments grow faster than inflation and you’re saving 20% of your income, you’re likely funding one year of retirement for every year you work.

So What Do You Do Now?

This brings us to our call to action:

• Take the time this weekend to review your current 401(k) plan and make adjustments if necessary to ensure you are on track towards building a nest egg for retirement income.

Most plans have tools available. If you’re not familiar with how to perform such an analysis, reach out to someone you know at work, a friend, a family member, or a professional advisor.

You are responsible for your financial well-being. Don’t delay in getting started today!

Would You Like More Support?

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• Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?

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• If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?

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If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.