Historically, the United States had three basic strategies for retirement: a well-funded Social Security system, substantial corporate pensions with retiree health benefits and, ideally, a strong personal savings rate. Now, the responsibility for providing a retirement income falls largely upon individuals. Because defined contribution plans are more common today, individuals have a greater responsibility for saving for their own retirement. The booming population now coming of retirement age faces additional challenges when it comes to creating a retirement income to support their desired lifestyle.
State and local government pension plans are typically underfunded, cutting back on benefits and raising employee contributions. When a new hire joined a U.S. Fortune 500 company in 1998, there was about a 59% chance he or she would be offered a traditional or hybrid defined benefit (DB) pension. As of 2017, that likelihood dropped to 16% in the same group of employers, according to a new Willis Towers Watson (WTW) retrospective report on large DB plans. Furthermore, due to the availability of new health insurance plans on the health care market exchanges for Medicare-eligible retirees, the percentage of employers that are somewhat or very likely to discontinue their employer-sponsored plan for retirees was projected to increase to 44 percent in 2015, up from 25 percent in 2014.
The sooner you start preparing for your retirement, the more likely you are to hit it out of the park! Retirement all-stars typically give themselves plenty of time to save, to recover from any market losses, and to allow their assets to accumulate. In our experience, those who can’t –or don’t – start early generally accelerate their savings when the time comes, doing what they can to make up for lost time.
It doesn’t matter what your income is. If you have a paycheck, you should have a strategy. The point of having a retirement strategy is to help ensure you can continue living life to its fullest every single day, with financial confidence. Have you heard the old saying: “If you don’t know where you’re going, how will you know when you get there?” Having a strategy in place can help you know where you’re going, as long as that strategy is up to date. With fluctuating market conditions and possible changes to your financial situation, we recommend that you review and, if necessary, update your financial strategy at least every three years.
Understanding all of your options is vital to making the right first steps to your financial future. Research, research, research. There are many different ways to save for retirement, and you’ll want to understand the pros and cons of the various strategies, insurance products, and investment vehicles before deciding which strategy to implement.
When considering your strategy, make sure you’re taking advantage of all of your options to help lower your taxes as much as possible, both whiles saving for retirement and once you start taking retirement distributions. Working with both a financial professional and tax advisor can help you understand your options. But, predicting tax policy is a tricky business, and there are some things for which you can’t prepare. For instance, if you have a lot of assets in pre-tax retirement accounts, any distributions from those accounts could push you into a higher tax bracket. Or, if you aren’t withdrawing from those accounts appropriately, you may incur penalties. Working with a financial professional from our team and a tax advisor can help you prepare for any future tax changes and avoid unnecessary taxes or penalties.
A key to a good retirement income strategy is having a budget and sticking to it. Tracking spending habits and not spending more than they earn is part of the all-star retiree playbook. For most people, cutting costs is the most powerful way to increase wealth; doing so requires sacrifices, even for some affluent individuals. By developing and sticking to a budget, all-star retirees are able to remain focused on saving money — taking full advantage of their employers’ 401(k) plans or employer-sponsored accounts. As a bonus, these conscious efforts to save money often spill over into the retirement years, when these retirees are already accustomed to living on less.
Those getting retirement right are disciplined and know to focus on their long-term goals and stick to their strategy. They know how to weigh their goals against their individual risk-tolerance levels, and they focus on diversifying and rebalancing their assets when necessary.
 Towers Watson. Aug. 21, 2013. “Health Care Reform Heightens Employers’ Strategic Plans for Health Care Benefits.” http://www.towerswatson.com/en/Press/ 2013/08/Health-Care-Reform-Heightens-Employers-Strategic-Plans-for-Health-Care-Benefits.