There was a recent article in the Wall Street Journal highlighting that private companies need to brace themselves for coming difficulties with their pension plans. Is this the result of the stock market returns? Not at all.
The company management concerns are the same concerns that all investors should have: namely the ever-increasing life expectancy that we will all experience. Private companies have been dealing with this problem for decades by switching their pension plans from defined benefit plans to defined contribution plans, such as 401(k) plans.
In fact, according to the American Institute for Economic Research, the number of American workers and retirees covered by defined benefit plans stands at more than 60 million. However, in 2011 (latest available data), the percentage of workers currently covered by these plans is only 14%. In 1979, the percentage of American workers was 38%.
The companies have prepared for this increasing life expectancy of their workers by shifting the burden of their workers retirement income needs to the workers themselves via the defined contribution plans – such as 401(k) plans. In 2011, the percentage of workers enrolled in 401(k) plans stood at 42%.
So what should investors do? First, understand the length of retirement that you are likely to face. Too many people assume that they will have a similar life expectancy as their parents. This assumption is not very likely.
The Society of Actuaries, the organization that tracks how long individuals are living to assist companies understand the risk of their pensions, has recently updated their mortality tables for the first time since 2000. The update reflects the longer life span of today’s retirees.
Based on their findings, the average man who turns 65 years old this year is expected to live to almost 87 years old, an increase of 2 years since their 2000 study. Women of the same age are expected to live to approximately 89 years old, an increase of 3 years since the last survey.
I bet this is longer than you expected!
As we have mentioned in previous posts, when planning for a retirement of a married couple, the time period needs to be past even the woman’s expected 89 years old to reflect the reality that two people together have a longer expected life expectancy then either individual has by themselves.
By the year 2029, which seems far away but is only 15 years from now, the study projects the increases for retirees will be 90 years for women and 88 years for men. Either way, a good starting point, if you are looking at a retirement age of 65 years old, is to plan for a 30+ year retirement.
So what does that mean for your investments?
Your investment portfolio will need to be invested in a manner similar to how private companies have invested their pension assets for years. These pension portfolios have included a large percentage of their assets invested in diversified global stocks. Your portfolio should also have this exposure.
The stock market has provided investors, through the decades, with returns that retirees need to help overcome the ever-rising cost of everything that you will need to provide for you and your loved ones in retirement.
When you retire, your 401(k) can be rolled over to an Individual Retirement Account (IRA) if you think that makes sense for you. Work with an advisor who understands the need to provide income for your extended life expectancy and helps you avoid the daily onslaught of news items that try to have you abandon your long term plans and the ownership of the great companies of the world.
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