Monday, 4 May 2015
In years past, many people found funding their retirement was simple and straightforward.
After working for an employer for several decades, they were able to stop working in their 60s and collect a steady pension. Combined with Social Security benefits, the retirees were set for the rest of their lives. The financial reality for many retirees is much more complicated today. Let's look at what's changed and how to think about funding your retirement.
Your grandparents or even your parents may have benefited from pension plans. Not only did they get a regular check during retirement, they didn't have to concern themselves with the source of the pension. That was their employer's job.
Those plans are quite rare these days, replaced by 401(k) plans, IRAs, and other avenues for saving and investing. While there can be advantages, these newer retirement plans require the individual to handle most of the investment decisions instead of the company providing the pension.
When Social Security was created, it was assumed that the large number of workers (paying Social Security taxes) would support the small number of retirees receiving Social Security checks. In 1945, the ratio of workers to retiree was 42 to 1. Today, that ratio is down to fewer than three workers for every retiree, creating a problematic imbalance.
What's the primary reason for this? Longer life spans. In the mid-1960s when Medicare started, the average life expectancy was 70.2 years. By 2010, the average had reached 78.4. And that's just an average — many people will live well into their 80s and 90s. That's great, but an increasing life expectancy also raises new challenges when trying to ensure retirees don't outlive their investments.
The new reality means that financial experts are rethinking how best to invest funds for today's retirees. A top concern is keeping ahead of inflation, which can eat up savings over the course of a long retirement. Stocks historically have been one of the more effective investments for that purpose, so advisors are now reconsidering how much of a retiree's portfolio should be in stocks.
Conventional wisdom previously dictated that retirees invest mostly in bonds because they provide predictable income. Stocks, on the other hand, can move up and down in value quite quickly. This makes them more challenging to retirees who have less of a timeline to recover from market downturns. Also, bonds require repayment by the company, which means they are generally considered a safer form of investment.
But now some financial experts believe that stocks are important for retirees as well as other investors. They believe that when stocks are combined with other investments that don't cycle up and down so dramatically, stocks can offer some of the guard against inflation that is increasingly important.
Financial service companies have provided general guidelines about how to consider your investments at each phase of your life. You may have seen charts and tables that show people where they should put their investments and how they should shift those investments in their later years.
Because of the complexity of today's financial markets as well as the other issues addressed above, relying on broad suggestions when it comes to investing during your retirement is difficult.
Each person's financial situation is different. Even though it's ultimately up to you to make decisions about your money, retirement investing is complicated and extremely important. That's why you should seriously consider consulting a qualified financial professional as you decide where to invest your money during retirement.
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