By Thomas Kostigen
Time was when retirement planning was largely taken care of for you by either your employer or the government (in the form of Social Security). But individuals now have become the captains of their own retirement ships, with self-directed plans, products, and education programs readily available online.
Still, a financial advisor should be a part of the retirement planning process. Two recent studies show why: According to separate analyses by Vanguard and Russell Investments, advisors increase investors’ returns by three percent or more. For a retirement account, especially, this increase adds up to a big difference. Compounded over the life of an account, the appreciation can be working less and having more at retirement age.
It wasn’t always this way. When defined benefit plans ruled the retirement landscape, workers knew what they’d get when they retired. Defined benefit plans are fixed, pre-established benefits for employees at retirement. (e.g. a certain amount of income—guaranteed.) These are actually more tax advantageous for a company as businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans, or 401(k)s.
Defined benefit plans are all well and good if you work for the same company from the start of your career until the finish. But the average employee these days stays with the same employer for less than five years, on average, according to the U.S. Bureau of Labor Statistics. That means a secure retirement isn’t so secure. Hence the popularity of 401(k) plans that came about after Congress revised the Employee Retirement Income Security Act in 1978. A very smart retirement benefits consultant, Ted Benna, spotted a provision in the revision in the Internal Revenue Code that permitted an employer to create a retirement plan to which employees may contribute a portion of their wages on a pretax basis. This section also allows the employer to match employee contributions with tax-deductible company contributions. Earnings on all contributions were all of a sudden allowed to accumulate in a tax-deferred trust. Benna presented the 401(k) plan to a client — and the rest is history, as employees were empowered with the fate of their future.
Things, though, are changing again. The Millennial generation is bigger than the Baby Boom generation, which largely benefitted from the 401(k) evolution. The Millennial generation saves more and invests more, and are more responsible with their money than they are given credit for. And more and more are investing for retirement themselves, as well. Nearly a quarter of people aged 24-41 who save have more than $100,000 in savings, up from 16% in 2018, according to a new report from Bank of America, for example.
This translates into retirement planning in a couple of interesting ways. First, Millennials are exposed to more retirement investing products that they can access. And second, they can not only educate themselves about retirement planning through the power of technology, they can better understand transparency issues, such as fees and performance, to ensure they are meeting their financial goals.
Indeed, the retirement plan of the future is said to look more like a universal basic income package for every citizen. We’ll look at UBI, and all its variants—especially for retirement—in our next column.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.