Pension Plans, 401ks, and Savings Accounts

The economic environment seems to be undergoing significant changes, and the baby boomers are on the front lines.  For that segment of the population, the outlook is increasingly challenging because there is less time to prepare for whatever’s coming. 

It is a certainty that we will all need to know how to navigate the road leading to long-term financial stability – but one of the most difficult aspects of today’s volatile markets is our knowing HOW to prepare for the unknown. 

Since we’re older and wiser now, experience tells us that we’re not going to be able to stop major transitions from impacting us.  As the next generation transitions into leadership roles, important issues will continue to evolve – whether we are retired or not.

So what do we do?  Should we invest or should we save?  If we invest, what vehicles do we use?  Is our future financial security out of our control?  How can we make our future more stable?

When navigating how plan for future financial stability, it is imperative to review our options.   This article does not make recommendations, however, it takes a brief snapshot of pension plans, 401ks, and savings accounts.

Pension Plans

Pension plans, once considered to be a stalwart of retirement planning, are now being viewed differently than before.  Because of bankruptcy proceedings happening in the city of Detroit, that city’s pension plan is at risk, but to what extent is unknown.  Even in the case of that one city, the financial hardships are difficult to predict because of the enormity of the issues.  As of yesterday’s news articles on the internet, it is not yet determined even what areas will be included in the legal battle and what areas will be scrapped.

However, the possibility of a pension plan leaving millions of retirees without future incomes takes a toll on a national level, especially since these problems are not isolated to that city.  Other U.S. cities and states are also facing severe economic hardships, and, depending on the legal precedent established by the bankruptcy, could take a similar course of action.  If this possible domino effect takes place, it could accelerate the country’s financial tailspin.

401Ks

A popular investment tool for millions of people is a 401k and is considered by some to have taken the place of the pension plan.  This tool typically allows employees limited ability to designate which stocks, bonds, or other mutual funds their monies are to be deposited into.  Because percentage amounts are designated into different investment funds, 401k plans are commonly considered to be “diversified.” However, diversification inside of a 401k is a misconception.

Funds that are allocated into different classes of funds, separate stocks, index or other mutual funds within one 401k are funds housed in one portfolio.  The employee receives one quarterly or annual statement showing all asset allocations, but it’s on one statement.  For diversification purposes, a 401k plan or any other single investment vehicle is considered one asset.  That one asset is included with other investments which make up the asset allocation model.

Savings Accounts

Besides pension plans and 401k plans, basic savings accounts are known for being safe vehicles to house liquid funds.  The standard school of thought has been that safety and interest earnings are inversely related.  If that thought holds true, then it makes sense why Americans continue to use savings accounts because they earn very little interest.  However, when one considers that interest earnings are taxed at the end of the year, interest earned in savings accounts does not keep up with the rate of inflation.  This begs to question the true “safety” of savings accounts.

If accessibility is a major reason for housing funds in savings or money market funds, ATMs are located in convenient locations all across the globe.  For withdrawals greater than $10,000, banks are required to complete a standardized form on the customer’s behalf.  In other words, yes, cash withdrawals are easily transacted but larger withdrawals are tracked.

Adding it All Up

What does all of this mean for us?  Core systems that we have depended on are being questioned and are becoming obsolete.  Previously-considered safe vehicles for savings and retirement are found to have crumbling foundations that millions of American households are built upon.  Yes, we’re baby boomers.  And baby boomers are known for their resilience and resourcefulness.  However, our retirement years will possibly not be the same as previous generations.

Stay vigilant and adapt when options are available.  Find additional ways to diversify retirement accounts.  Increase the number of income streams so that possible decrease of one won’t make so much of a difference.  Find opportunities to be productive and learn new skills.  Be proactive with your own retirement accounts and monitor allocation percentages.  Find ways to make positive changes, and then experience the excitement that can be the “golden years.”

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