Once upon a time, the American dream was pretty easy to quantify. A person would get a high school or college education, get a job at a large company or an agency of their state or federal government, and work there for 30 or 40 years. They would buy a house, pay it off, and retire with a guaranteed income and health insurance for the rest of their lives. For most Americans this is a vision of the past.
Over the past decade, thousands of American companies and institutions have abandoned their defined benefit pension plans in favor of unguaranteed defined contribution plans, such as 401(k)s and 403(b). With an aging workforce, this move has allowed companies to save large amounts of money by eliminating the need to fund large pension obligations, particularly in times of falling interest rates and a volatile stock market. According to Edward Wolff, professor of economics at New York University, “things are not looking good for retirees with the collapse of defined benefit plans. It was one piece of the puzzle that kept retirees afloat. In 20 years, “The only people with these plans will be government employees.”
This trend has forced employees to become their own money managers. Unfortunately, the average worker is woefully unprepared for the responsibility of such a task. Most 401(k) and 403(b) plans limit the investment selections available to plan participants. With few exceptions, an employee can only access this money when changing jobs or retiring. Despite occasionally attending employer-sponsored educational workshops, defined contribution plan providers generally do not provide investment advice, leaving the employee to make important investment decisions alone. People become responsible for managing their most important asset and making sure it lasts the rest of their lives.
With interest rates at all-time lows, huge swings in stock and commodity markets, rising inflationary pressures, and ever-rising healthcare costs, what can a person do? When one reaches the preservation and distribution phases of your investment’s life, it is critical that your investments be structured in a way that minimizes or eliminates portfolio losses and positions your portfolio for guaranteed income streams that may not survive. With more than 10,000 baby boomers turning 65 every day, the insurance industry has recognized the challenges inherent in the new economic reality we live in and created a number of options for people to create their own “guaranteed” pension plans. . Structuring these guaranteed income streams should be done with the help of a qualified financial professional, such as a registered investment advisor.
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