Working Americans have traditionally been advised that a comfortable retirement plan depends on a “three-legged stool” of Social Security, a company pension and personal savings.
Yet that formula today is increasingly wobbly. With the fading of pension assurances, it’s essential that American families update their planning.
Social Security is well designed to ward off destitution in old age, but the payments are too small to provide the comforts, or even the necessities, many retirees expect.
The latest sign of the growing insecurity of working stiffs – both the blue- and white-collar variety – came when IBM recently announced it would freeze its $48 billion pension fund. Employees already in the fund will receive benefits when they leave or retire, but those payments won’t grow with additional years on the job. Instead, IBM increased contributions to its employee 401(k) retirement plan.
The trend away from defined pension programs is striking. In 1980 nearly 40 percent of working Americans were covered by traditional pension plans. Today, so many companies have eliminated or frozen such plans that only 21 percent of workers are covered by traditional pensions. The shift to 401(k) plans does provide a viable alternative for millions, however – so long as the funds are invested wisely. Rule one for active workers with 401(k) plans is to ramp up their contributions to the maximum the law allows. Rule two for those workers – and the only option for the millions who don’t even have access to 401(k) plans – is to increase their personal savings.
Unfortunately, a frightening number of Americans have no savings at all. Last October, the U.S. Department of Commerce actually reported a negative national personal savings rate of -0.7 percent, the lowest since the 1930s. That statistic isn’t quite as bad as it looks, because it measures after-tax income, thus excluding money in the tax-deferred 401(k) accounts. But workers under age 59 1/2 can’t withdraw money from 401(k) accounts without paying heavy penalties. Their lack of personal savings thus makes them terribly vulnerable to such financial bumps in the road as layoffs or illness.
It’s worth noting that some Coloradans are saving more than these dismal national averages.
The Boulder-Longmont area ranked 16th in the nation in personal savings, and Denver was 30th.
But overall, Americans need to observe the upcoming 300th anniversary of the birth of Benjamin Franklin on Jan. 17, 1706, by rediscovering the virtues of thrift and saving that he preached so memorably.
