Will Our Children Be Better Off in Retirement than We Are?
By Raymond F. Ciccarelli
When we take a look at the landscape of our work histories over the years, we find that many working people in the 60s, 70s and 80s have worked for one company for most of their lives.
In many cases, they could count on a defined-benefit plan, a pension plan that provided a guaranteed income stream, or at least a lump-sum payment upon retirement. At that time, there was no concern about the solvency of Social Security as a dependable income source in retirement.
When we compare that situation to the current financial circumstances facing our children and grandchildren, what is the likelihood that the younger generations will work for the same company for 25 or 30 years? Almost zero!
If Social Security still exists, the benefits will most likely be reduced and insufficient for covering retirement income needs. The likelihood of having a defined-benefit plan through an employer is virtually non-existent today.
As parents and grandparents, it is vital for us to spend time with our children to help them recognize the value of saving from an early age. If they are not disciplined in making consistent contributions to their retirement savings plans, then their chances of achieving financial security in retirement are quite low.
Given the shifting retirement landscape, the need to make the most of 401(k) plans and other retirement accounts has never been more critical. While most younger people have access to a 401(k) plan through their employer, many providers spend little to no time explaining the benefits of the plan, how to participate in the plan, and how and where to invest the contributions.
When our children begin their careers, the top priority should be ensuring that they are fully participating in the company’s retirement plan (if one is offered).
If they do have the ability to make contributions to a 401(k) plan, help them to see the benefit of consistently saving at least 5% of their income into the program and investing their asset in a growth-oriented financial strategy. We suggest setting aside 5% of their annual income, as that amount typically will not significantly hamper their cash flow.
Since participating in a 401(k) plan will result in an automatic payroll deduction, your children and grandchildren will not feel as though they are missing out on money as they progress in their career. Additionally, some employers offer a 401(k) match based on a certain percentage of income (typically 2-5%). In these instances, someone who contributes to their 401(k) each pay period will effectively be earning more money than their colleagues who do not participate.
A good goal for progressively building a strong asset base for retirement is to increase contribution rates by 1% each year (especially if their income steadily increases throughout their career).
Retirement savings plans come in a variety of configurations depending on the type of employer. While most private businesses have embraced the traditional 401(k) plan as the gold standard for retirement savings, some public-sector jobs – especially education – offer different programs.
For example, teachers or administrators who are employed by the state may participate in a tax-sheltered annuity. In some cases, employees of colleges and universities have access to a 403(b) retirement plan.
Regardless of the specific details of these employer-sponsored plans, the key to building a comfortable nest egg for retirement is contributing early and frequently. Your goal as a parent and grandparent should be to work with the next generation to understand the benefits that are available to them and get them started in a steady accumulation account.
If no retirement savings plans are offered through their place of employment, you need to focus on the value of contributing to either a Roth IRA or traditional IRA account. Again, the most imperative steps to promote your children and grandchildren’s future success is to help establish the account for them and have them transfer funds from their checking account to the IRA each month. Our team of advisors is more than happy to evaluate which type of IRA would be most beneficial for them.
If we fail to teach our children and grandchildren the long-term benefits of putting away dollars on a regular basis, then they are unlikely to attain the financial freedom that can result from properly designing and executing a strategic retirement plan.
On the flip side, a well-thought-out savings plan that is implemented throughout the duration of their careers will position them to be even better off in retirement than we are.
