What Happened to the Good Old Days of Pensions?

My father worked very successfully for 30+ years at one company –  MetLife Insurance Company – as was common for many of his generation.  My mother now receives a monthly pension check from MetLife due to my Dad’s productive working years and she will receive a pension check for the rest of her life.  

However, the days of a former corporate employer paying you a life-time pension for you and your partner are dwindling quickly.   Although this is not a fatal proposition for pre-retirees, actions need to be taken to account for this changing landscape.

First, the responsibility for handling one’s retirement income is no longer the risk of your former employer.  People will now be responsible for providing their own retirement income with the introduction of the 401(k) plans and individual retirement accounts (IRAs) years ago.  This new paradigm shifted the financial responsibility onto individuals without the necessary knowledge on how to handle investments or how to provide lifetime retirement income.

With this fundamental change in who is responsible for providing retirement income, there came to light two realities.   Many people are unaware of these realities or do not fully appreciate the tremendous impact that they will have on their retirement. As you move careers or retire, look to use a competent financial planner to help ensure that your retirement portfolio is properly invested to deal with these two realities discussed below.

The first is the tremendous increase in longevity.  For a married non-smoking couple retiring at age 62 (the average retirement age in the U.S.), their joint life expectancy has increased to require that they plan for a 30+ year time horizon in retirement.  This fact has eluded most couples as they project their life expectancy to be that of their parents’ generation.  However, with scientific knowledge nearly doubling every five years, the result has been an incredible expansion of life expectancy which must be accounted for.

The second is a result of this increased longevity: decreasing purchasing power over time.  This issue was not a factor with shorter longevity of yesteryear and is a major factor of why companies have and will soon exit the pension providing business.  During those 30 years in retirement that an average couple should plan for, the cost of all that they will need to purchase to maintain their lifestyle will increase continually – if history is any guide.

The postage stamp, a symbol or proxy for an everyday item that we purchase, has increased from 20 cents to 49 cents over the last 30 year time period, while a new Ford automobile,  a large purchase needed every several years, has increased from $6,250 to approximately $25,000 today.   If the prices of needed purchases increases just by the average Consumer Price Increase (CPI) increase over the past 80+ years (compound approximately 3% yearly), a dollar today would need to increase to $2.44 at the end of your retirement just to keep the same purchasing power.  You will need to ensure that you invest in investments that have overcome this inflation risk.

The best way to handle all of these factors is to work with someone who will help create the proper financial plan, and most importantly help modify your investment behavior so that you have lifestyle sustaining income throughout your retirement.  Everyone needs to realize that help is available for people to adjust to these changes occurring in the marketplace.  Seek a competent financial planner to help work with you to overcome these issues.

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