Disappearing Pensions Make Investing All The More Vital

It is somewhat hard to grasp today, but the concept of retirement has not been around for very long. Morgan Housel illustrates this well in his most recent book, The Psychology of Money:

“The entire concept of being entitled to retirement is, at most, two generations old. Before WWII, most Americans worked until they died. That was the expectation and reality. Let me reiterate: the 401(k), the backbone of American retirement, did not exist until 1978. The Roth IRA was not born until 1998. If it were a person, it would be barely old enough to drink.”

Even in this short sliver of our nation’s history, the retirement landscape has changed significantly. A trend worth monitoring today is the disappearance of pension plans. Of those retiring from the private sector today, 4% have a pension plan as their only retirement account offered through their employer (and only 14% have a pension plan coupled with another type of account). This is down from 60% in the early 1980’s. This is because of one simple reason: pensions carry more liability risk for the employer than do 401(k)’s. In a pension, the risk is on the company to generate returns adequate enough to fulfill the payments promised to retired employees. But it is reversed in a 401(k); the employee accepts the risk of setting aside enough to fund retirement and is entitled to the balance of the 401(k) upon retirement.

This trend is especially troubling given that a large portion of today’s workforce would prefer to retire earlier, yet at the same time life expectancy continues to increase. Couple this with the fact that some economists are predicting Social Security’s trust funds to be depleted by 2035. This combination translates to today’s young investors: a) relying on their investment portfolio for a much longer duration; and b) Social Security and pension income slowly evaporating. It is not an exaggeration for those entering the work force today to expect almost the entirety of their retirement income to come from their own portfolio. And based on a TD Ameritrade survey of 2,000 US adults (age 40-79), the savings rate of most portfolios today do not look adequate enough to support solely someone in retirement:

Several decades ago, this chart would not be as troublesome because retirees could rely on their pensions and Social Security benefits to help support them in retirement. But those days are gone. This makes investing all the more vital for those young earners who may not have a pension or Social Security benefits to rely on in retirement. Visit our previous blog on saving for retirement when time is on your side, so you can navigate the always changing retirement landscape.