How safe is my Retirement Plan? Social Security, 401k, and Pensions

How do I know when I can retire?  How much do I need to save to be able to retire?  How much money will I need each month to survive in retirement?  There are so many uncertainties when planning for retirement because as humans, we cannot predict the future.  I worry that the current planning for retirement is not asking the right questions, and many people will be caught unprepared if/when conditions change.  How do I plan for retirement in 30+ years and prepare myself for the unexpected conditions?

Current budget debates in the US will likely result in fewer benefits for retirees and increased costs of living, especially for health care.  By the time I retire in 30+ years, what will the tax rate be on retirement income?  How will my savings keep up with the cost of living?  Now that current retirement programs rely heavily on investment in financial markets, what unforeseen events will dramatically effect the security of these programs?   How do we create a system/plan for retirement that provides a secure standard of living for the unpredictable future?

Retirement Options

Social Security insurance (SS) came out in 1935 as part of the New Deal under President Franklin D. Roosevelt with the intention to support the poor elderly population. The program has many functions including retirement “insurance.”  The design of the retirement benefits relies on an expanding population to pay a tax covering plan expenses.  Under this plan, the government is responsible for raising the funds to meet promised benefits.  Past surplus has been used to buy government bonds, so the government has used the money with the option for the SS program to redeem that money in the future when needed.  As the large baby boomer generation enters retirement, the promised benefits are more expensive than the funding from payroll taxes, and the government will have to pay out on those bonds to cover SS expenses.  We do not yet know what will happen when the extra money lent to the government is fully repayed and additional funds are needed.

Pension plans are not insurance but rather a plan that accumulates retirement savings for a group of employees and invests the money to cover future benefits costs.  Pensions are run by an employer group.  The liability is on the employer group (sometimes local or state government) to provide the promised benefits.  In addition to struggling with predicting  future costs and appropriate benefits for retirees, these plans struggle with secure investment options for financial growth.

401k plans are pretax, individual retirement accounts that change the responsibility for paying benefits to the individual.  We individually save for retirement, invest that money for growth, and plan our own withdrawals of that money from the plan.  That account is a finite amount of money to live on.  It’s now our individual responsibility to create the right plan for funding our retirement.  My concern is that we may not all have the necessary skills to determine the correct plan to last throughout retirement.  Pretax retirement plans like a 401k delay the time you pay taxes on the money until it is withdrawn, hoping you will have a lower tax rate at the time of retirement compared to the year the money is saved.  (Who knows what the tax rate on my 401k withdrawals will be in 30+ years).  There are penalties for withdrawing money from the 401k before reaching age 59 1/2.

Post tax retirement plans like a Roth IRA are savings for after taxed money and do not apply income taxes at the time of withdrawal.  An advantage of the Roth IRA over a traditional IRA/401k is that there are fewer withdrawal restrictions and requirements.

Planning and Calculating

I suppose if you are close to retirement, it may be possible to have a secure financial plan and rely on the various sources of income.  Online calculators can help you understand expected income and expenses during retirement.

  • the Motley Fool has a detailed calculator which can be helpful to all ages
  • There is an online retirement calculator to estimate your SS benefits at the time of retirement.  They also have a “Life Expectancy” estimator.
  • Some of your social security benefits may be taxed, see this calculator
  • A description of SS benefit calculations

These calculators analyze based on average rising costs of living.  What happens during times of high inflation, which may escalate under the current budget and economic conditions.  I feel more secure about doing my own taxes than predicting future needs during retirement, so how will I know when I have saved enough?  What will happen down the road when groups of people miscalculated their 401k funds and run out of retirement income?  What government programs will be needed to support this group of people, and how likely am I to be included in that group?

Dispair.com view on Retirement

A new (29 Sept 2011) article on NPR talks about these same issues.

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