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Can You Afford to Retire? Did
you see the United Airlines bankruptcy story on the PBS TV show called "FRONTLINE"?
Did you see that when United declared bankruptcy it dramatically reduced its retired
workers pension checks as well as current workers' pay checks and affected their
retirement savings? And, did you see that it didn't affect the company's top executives
one bit? - They walked away with "golden parachute" retirement packages
worth millions! On top of all that, the bankruptcy attorney's made a fortune handling
the case. The
US pension system is entirely inadequate or even nonexistent. Social Security,
which came into effect in 1935, is to this day a very limited benefit and was
never conceived to be more than a supplemental pension. Due to changes carried
out by the US government, the age at which workers can qualify for Social Security
benefits will soon rise from age 65 to age 67. In addition, the Bush administration
has been campaigning to open up Social Security to private investment so that
individuals can also put a portion of their benefits into the stock market. Why
Does Retirement Cost So Much? More
than half a million dollars - That's the price tag for retiring at age 65. As
companies abandon lifetime pensions in favor of 401(k) plans, more workers are
coming to grips with the staggering amounts they will need to save on their own.
And they're asking, "Why does retirement cost so much?" The
answer, in short, is that Americans are living longer - so much longer that many
of them will outlive their retirement savings. By living longer, Americans confront
potentially crippling health care costs. According to a March 2006 study by Fidelity
Investments, a retired couple without employer-sponsored health insurance can
expect to pay $200,000 for out-of-pocket health care costs like premiums and co-pays.
Moreover, this number does not include significant costs like long-term care,
which isn't fully covered by Medicare. Assuming
the current inflation rate of 4%, the cost of living will double in 19 years,
meaning that an American retiring today will see the purchasing power of their
retirement savings drop by half during their expected lifespan. And today's inflation
rate is historically low; a higher rate of inflation would make matters worse. According
to the 401(k) plan records analyzed by the Employee Benefits Research Institute,
Americans approaching retirement have, on average, 3 times their annual salaries
in their accounts. Without any other form of savings, these retirees will burn
through their 401(k)'s in just 7 or 8 years, leaving them facing 10 or 11 years
(based on life expectancy) with nothing but Social Security. In
order to retire comfortably, experts generally agree that retirees need at least
15 times their final annual salaries. That means a worker making $50,000 a year
before retirement would need to save $750,000 in order to retire. "The average
American household has virtually no chance to reach an adequate retirement savings
in the next 50 years," commented Christian Weller of the Economic Policy
Institute. Do-It-Yourself
Pension Plan The
401(k) became the new model for pensions during the 1970s recession. Faced with
the economic downturn, major corporations, with the collaboration of the unions,
began severing long-term commitments to their employees. According to the authors
of The Great 401(k) Hoax, "It wasn't the current cost of pension plans that
most frightened corporate America. The real financial trauma was the implication
of these obligations for the future of corporate balance sheets. Long-term pension
liabilities were virtual black holes." In
today's "do-it-yourself" but "don't know if my pension will be
around tomorrow" world of retirement, retirement is uncertain and scary for
most of us. The 401(k), as the plan is known, is literally a do-it-yourself retirement
plan completely dependent on the vagaries of the market. With over $7.7 trillion
wiped out in 2 and 1/2 years by the 44% fall of S&P 500, many face a shrinking
pension or none at all. Unlike a high-powered executive, the average worker has
no broker who is consistently following and monitoring their investments for them.
The 401(k) plan places the responsibility and burden entirely on the worker. Even
when companies offered matching contributions to 401(k) plans, on average they
only contributed 2% of pay, compared to the 6 to 7% of pay they typically contributed
to traditional pension funds. Enron, like many companies, strongly encouraged
employees to invest in the company's stock. Thousands of Enron's current, laid-off,
and retired workers lost most of their life savings when the company prevented
workers from selling its stock held in 401(k) accounts, just as the stock price
was plummeting. Reports
on account balances in 401(k) plans often give a more optimistic picture of retirement
savings, because the assets of higher income workers skew the results. At the
end of 2000, while the average account balance was $49,000, 44% of participants
had balances of less than $10,000. In
contrast to the plight of working people, however, the top executives of companies
engulfed in financial scandals have no retirement worries, even in those instances
where their companies have collapsed. In the case of Enron, Jeffrey Skilling made
$78 million. Laid-off Enron workers received a mere $4,500 severance payment,
no matter how many years they had worked for the company. It's
wrong - very wrong - when those big corporations defraud their employees and the
public, then just get away with it leaving us holding the bag. It's an absolute
shame that most Americans are left to fend for themselves financially without
adequate training or experience when it comes to investing for many of our life's
most important needs, including our retirement. This
is one of the major reasons why an experienced and well-trained financial advisor
- especially one that operates with integrity and their client's best interests
in mind - is worth their weight in gold. 
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