by David Lukas

Who’s Supporting You In Retirement?

Part 1…

Not that long ago, we could count on the support our employers provided in retirement. With Social Security’s future uncertain and the ever-growing decline of pension plans (Defined Contribution Plans), the rise and the popularity of defined contribution plans (Primarily 401k’s) who should you be putting your faith and trust in? Who do you think—better yet who do you know will be supporting you in retirement? During this post, I’m going to focus on two of the five players in retirement. The players you’ve invested most of your professional time and a lot of money into.

 The first line of support for many Americans will be fulfilled by the government. In retirement, Americans have come to rely on supporting their retirement via Social Security, Medicare and in some cases, Medicaid.

social security and retirement income

  • Fact: Social Security (SS) is a vital part of planning your retirement correctly because depending on when and how you choose to start collecting your benefits can greatly affect the security of your financials before and after collecting in the future. Social Security, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) is the federal program that was originally signed into law by President Franklin D. Roosevelt in 1935, and was/is meant to provide supplemental benefits that greatly aid in and during retirement. Since the last amendments that were made to SS, it now besets both social insurance and social welfare programs as well. Recently there have been valid concerns about current status of Social Security and its solvency. FACT:  Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits….
  • Medicare is another of our national social insurance programs, that was first administered by the United States Federal Government back in 1966. Medicare currently uses around 30 private insurance companies across the United States and provides benefits for Americans aged 65 and older who have worked toward and contributed to the system. Medicare also provides health benefits to younger people with disabilities and particular diseases.
  • Medicaid is a social program that was developed as a response to a need for healthcare for low-income individuals. The Health Insurance Association of America describes Medicaid as a “government insurance program for persons of all ages whose income and resources are insufficient to pay for health care”. Medicaid is jointly funded by both state and federal governments and managed by the states. It is up to each state’s discretion  to determine who is eligible to collect. Each state has participated since 1982, although it’s not required. In order to reap benefits, Medicaid recipients are supposed be US citizens or legal permanent residents, although there is ample evidence that many who aren’t here legally receive assistance. Poverty alone does not necessarily qualify someone for Medicaid. In other words, the state has the power to decide whether you are or aren’t eligible for state medical subsidization. Many states are expanding medicaid. For instance, my home state of Arkansas has expanded coverage to an additional 275,000 people.  In retirement, Medicaid often funds long term care such as nursing home cost for those who run out of money in retirement.
  • 401(k) office folder on desktop on table with office supplies.As a retiree, or soon to be retiree, your second line of support is most likely be your employer retirement savings plan. There’s a good chance that your employer offers either a defined benefit plan (pension) or, the most prevalent, a defined contribution plan (401k and other qualified plans). So, what’s the difference between the two?
  • A Defined Benefit Plan, aka pension retirement plan, is a plan that is/was developed to provide retirees with life-long income during retirement after they are no longer earning a steady income from employment. This is the type of pension that my granddad enjoyed when he retired in 1978. To this day, may almost 101 year old grandmother still receives this benefit! In most cases, these type of retirement plans require both employers and employees to contribute to a fund, during their employment, in order to receive said defined benefits during retirement. What is the benefit? A guaranteed income for life in retirement that cannot be outlived.
  • A Defined Contribution Plan, aka 401k retirement plan, is a plan that was originally intended to be a supplement to the traditional defined benefit plan (pension).  What employers quickly realized is that the 401k allowed them to get out from under the long-term obligation of providing a pension. Essentially, the American worker was told: “You are now the owner of your own investment fund. But we are not responsible for whether it will be enough to provide a decent pension. That depends on you.” Over time, Defined Contribution plans that are stock market dependent overwhelmingly replaced plans in which companies promise fixed, reliable, benefits to retired employees. Tying the fate of the American family to the level of the Dow Jones represented a radical transformation of the American pension System. Wall Street was all too happy to fill this void. How is Wall Street benefiting off of your hard earned retirement funds? Firstly, they’re not just making money; they’re making a killing! The majority of 401k and similar plans today are supported primarily by overly priced risk laden mutual funds provided by none other than Wall Street. And who takes all the risks? YOU DO, the American worker of course. Their money is guaranteed (fees), yours is not. As if all that isn’t bad enough, guess what happens when you need to finally use and enjoy the money you saved in your 401k? The truth is, you have a tax tumor that many people didn’t even know existed. How can you deal with this tax-tumor? Set your retirement up with someone who understands retirement income planning.

Now that you’re better acquainted with the first two players that provide major lines of support in retirement, you can ask yourself, “right now, can I retire Worry Free?” If you answered yes, you are a diamond in the rough. But for most of us, it does/will take all five supports to fully pull off a Worry Free retirement.  Who are the other “players” that can support you in retirement? They are…

  • Insurance Company(ies) – focused on guarantees, certainty by issuing contracts.
  • Bank(s) – offers support by having a “safe” place to keep money.
  • Wall Street – provides opportunity for growth of investments, but no guarantees of lifetime income in retirement.
  • Financial Advisor/ Retirement Planner – offers support by planning your retirement ethically and responsibly.

Curious about how the rest of these players work to help you The WorryFree Retirement®? Look for Who’s Supporting You In Retirement, Part 2 Coming soon. You don’t want to miss it.