Recently I read an article in the Washington Post discussing ways to “fix” the current retirement savings problems in the U.S. It is no secret that many Americans are vastly undersaving and will not be able to meet their retirement needs. You can find the article from the Washington Post here.
Problems With Current Retirement Plans
Currently in the United States, our options for retirement savings are usually either contributing to an individual retirement account (IRA) or a employer sponsored 401k.
According to the article, the problems with the current method are high costs, lack of participation and lack of investment knowledge.
Employer sponsored 401k plans are very costly to the saver and employer which ends up reducing the amount of money ultimately saved for retirement.
Many private employers do not offer 401k saving plans to employees thus forcing employees to look for other options.
Many employees choose for one reason or another to not save at all or not save enough for their retirement needs.
Many employees do not educate themselves on investing and therefore take on too much risk when it comes to their retirement savings.
How Can the Current Retirement System Be Fixed?
According to the article, it seems there is backing to create what appears to me to be a federal retirement fund system. The idea is to create a national retirement fund where all workers will be forced to contribute a certain percent (say 3%) of their wages. With this contribution comes the guarantee of a certain monthly dollar benefit at the time of retirement. Something similar has been created in the state of California.
The benefits of a system such as this would be that your retirement savings are portable. Employees would be able to switch from employer to employer and not have to worry about taking their retirement savings with them. Savings would be through the federal plan and therefore would be the same across all employers. Another benefit is that everyone would be required to save for retirement and therefore would receive some kind of benefit once reaching retirement.
I’m going to be honest and say I’m not the biggest fan of an idea of a federal pension fund system. For me this system sounds very similar to Social Security and we all know how that has turned out. Many from my generation now go through life paying into a system of which we expect to receive little benefit (if any benefit at all) back once we reach retirement age.
I understand the needs to overhaul the retirement system. We cannot have a society where a large percentage of the population completely fails to prepare for their financial future. At some point everyone will be unable to work whether they still want to or not. At that time we will either have prepared and be able to live off of our savings or someone (family, government, taxpayers) will be forced to support us at a minimal financial level.
Personally, I take part in the current system and feel it will work well for me. I abide by the current rules and believe I will have a nice retirement when the time comes. I don’t feel that the system should change for those of us who are responsible enough to make it work. I like having the ability to manage my own financial investments. I don’t want to contribute to a federal fund where I have no say in the ultimate outcome. I like deciding exactly how much I will contribute and choosing my own investments.
However, I understand this doesn’t work for everyone. I am responsible enough to know that I must save for my future. Others have not made that decision. I am responsible enough to educate myself on the different investment options available. Others either choose not to or are unable to understand.
I really don’t have a solution. I like the freedom to plan for my own future. I think I’m capable of doing this and believe I am setting myself up for a decent retirement. I think the American population needs to take some responsibility for their own future. Learn, plan and prosper.
However, I understand the need to do something because many people aren’t planning and aren’t taking the necessary steps necessary to secure their future. For these people, a forced savings program directed by an investment professional (with low fees) would be ideal. But I don’t know how you decide who is forced to participate and who can direct their own retirement savings.
My Advice for Saving for Retirement
Currently I save for retirement by putting a percentage of my income into my company’s 401k plan. I have diversified the assets amongst several different types (stock, bond, international) of mutual funds offered under the plan. Along with this contribution, I put aside another portion of my income monthly in a taxable account to invest in dividend growth stocks and a bond mutual fund. I feel the combination of the 401k savings and the taxable account investments will allow me to reach financial independence in my elder years.
If you don’t have the option of an employer 401k to contribute to, then I would recommend opening up an individual retirement account (IRA) for retirement savings. You can open one through most online brokerages that will offer low trading fees. You can then set aside a certain amount of your income up to a certain limit which will grow tax advantaged. If you are able to save more than the limit, then I suggest opening a taxable account and investing more. There are many investing strategies available. While I prefer dividend growth investing, others may like the ease of index funds.
No matter what you do, it is imperative that you plan. We will all be forced to retire one day. We must plan for that day when we are no longer earning an income. Set aside a portion of your paycheck throughout your working life and you will be better off than those who don’t prepare. Americans need to learn to take responsibility for themselves. Prepare yourself for the future. Educate yourself on financial planning and investing. Make your life better.
Do you think the retirement savings system needs fixed? What would you suggest as an alternative? How are you currently saving for your retirement needs?
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