Harvard Business Review (HBR) published a dire warning seven years ago. Most Americans don't know how to execute a retirement strategy that addresses the most prominent risk-income insecurity. With fewer people receiving guaranteed income from pension plans, we've been forced to rely on our own planning to take care of cash needs in retirement. How can you ensure that you don't run out of money in retirement and that you'll have enough income each month to pay all of your bills?
Despite talks of crisis in HBR, it's not all doom and gloom. You can develop an investment strategy to set yourself up for a successful retirement. Educate yourself, focus on creating predictable income, and address the most prominent risks. If you can put those key considerations together, you'll be on your way.
Pensions used to be commonplace for retirees. Monthly income wasn't a concern for most households, which enjoyed guaranteed paychecks from pensions and Social Security for life. This income security is changing rapidly as fewer private employers offer pensions.
Load Error
About one-quarter of full-time workers participate in a defined pension benefit plan, but that number is much higher for government employees. Only 11% of private-sector workers currently participate in pension plans, down from 35% in the 1990s. This was a necessary shift to keep many businesses out of bankruptcy, but it means that the burden of creating stable retirement income was shifted to households.
Retirement accounts such as 401(k)s or IRAs have become more popular, and they're wonderful vehicles for asset building. However, the shift resulted in two major shortcomings. First, people generally don't know exactly how much they need to save up to retire (and most people are falling short of the actual number). Second, a 401(k) can't guarantee predictable income flows when income earners finally stop working.
Rock-solid retirement plans are focused on creating stable income streams that are high enough to meet basic expense needs and lifestyle expectations. You need to ensure that you'll have enough retirement cash flow to live comfortably. Oddly, income planning generally takes a back seat to return on investment when people talk about retirement accounts.
A few factors are driving the focus on return on investment. First, it's important to achieve strong returns on your retirement assets throughout your working career. It's great to get the most out of your savings, so you'd obviously want to maximize the gains possible within your risk tolerance.
Investment professionals and the media also play a meaningful role. Financial advisors and asset managers are often assessed on the returns delivered by their allocation strategies. Risk management takes a back seat, and income planning isn't even an afterthought in many cases. You almost never hear about income planning in major financial media outlets. It's kind of boring and far less intuitive, and it isn't particularly interesting to viewers or readers until they are approaching retirement.
The media and advisors shouldn't be demonized for this. They're responding to consumer expectations, after all. Still, it's clear how this can cause problems when people suddenly have to grapple with an unfamiliar planning requirement at a pivotal time.
Social Security is an important part of the retirement income puzzle, but it can't be the only one. Average Social Security benefits are well below median income for most households. In fact, Social Security for most people is only modestly higher than the federal poverty line.
Despite this glaring deficit, today's seniors are too heavily reliant upon Social Security. It's the only source of income for 40% of retirees, and it's the largest source of income for more than 90%. Given the potential for government retirement benefits to shrink in 20 to 30 years as the system might struggle to self-sustain, that could grow into a real problem for people who aren't creating income elsewhere.
You can't solve the issue overnight, but there are a handful of steps you can take to protect yourself.
SPONSORED:
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.