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A Case for Thinking Beyond 401Ks and RRSPs

There is an entire industry devoted to helping adults save for retirement. Company pensions do not exist any more except in few rare instances, and even when they do, the current economic environment and the increasing job mobility makes it difficult for any employee to put in enough years at an employer to grow it to a size that can provide a good income stream during retirement.

The consumer society and the changing demographics also mean that people are saving less now than ever before in the history. 401K plans and RRSPs are solid ways to encourage citizens to save for their retirement. And while everyone should take advantage of the tax advantaged saving options that are available to them, it alone may not necessarily guarantee a financially secure retirement for the reasons below.

1. People are living longer

A few decades ago, retirement on average meant about 10 years after leaving workforce. Today, it can easily be 20 to 40 years. By the time the generation that is entering the work force today retires, they may be facing as much as 50 years of retirement on average, which will be longer than the amount of time they spent working and saving. This of course assumes that the average retirement age stays around 60 years.

Now when you consider the aging populations in North America, and the financially tenuous nature of the Federal programs such as Old Age Security, it suddenly starts painting a bleaker picture of the golden years than what we are used to watching our parents and grand parents.

2. Job security does not exist

Globalization has changed the way our economy functions. As a free marketer, I do believe that free trade is ultimately good for the society overall, but the benefits take a long time in coming. In the meanwhile though, there are disruptions that if not properly managed can create societal problems. It is now much easier for the employers to shop around the world for lower costs, and they are doing precisely that.

Technological advances and rapid changes in lifestyle and tastes also mean that old jobs are becoming extinct much faster than before and jobs that replace them often require new skill sets. Today, a job is just a contract between the employer and the employee, which either side can easily get out of for better opportunities.

3. You and I will eventually have to pay the Federal debt off

Whether it is in the form of higher inflation, bigger taxes and rapid devaluation of the currency or reduced social and welfare benefits, the debt situation will take its toll. If you have a million dollars saved for retirement, it may not mean much when you retire if the dollar loses its value.

The upshot of all this is that your 401k or RRSP savings will not be enough for you to retire on and it is foolish to expect the government to be able to support the retirees with social programs. Our kids will be too busy with the financial burdens that our generation are placing on them to be of much help to support us in our retirement years. It is completely upon us to take control of this situation and do something about it.

There are 3 possible options I see and we will have to use a combination of all these three options.

a. Prepare to work longer, years into “retirement”: Every year that passes by, this becomes more of a reality for the new retirees. Becoming a Wal-Mart greeter is not pleasant, and is not even necessary, if you plan ahead. There are many opportunities to work part-time, or do freelance work if you keep up with the technology, to allow you to generate income and at the same time enjoy the benefits of retirement to a large degree. Fortunately, with the modern medicine and healthier lifestyle, it is also physically and mentally possible to virtually extend our retirement age when necessary.

b. Invest aggressively: In addition to the tax deferred retirement programs, you should invest on your own. It does not have to be risky but I think now is the time to move past the traditional “100 – your age” allocation to the stocks that is recommended. The fact is that these recommendations worked when the average life expectancy was in 70s. Now you need to plan to live to be 90-100 years old and these kind of allocations will turn out to be very conservative and will not serve you well. Find some good solid stocks to buy, maintain proper diversification and invest with discipline. Use the research and the low commissions that a broker like Zecco provides.

c. Reinvest in the community and our neighbours: I am all for supporting local small businesses and farms to the extent we can. It not only keeps the wealth in the community, but stronger community bonds are necessary to strengthen some of the social structures that will suffer as the budgets for social programs are stressed and slashed. This way we can help create more jobs for older generation when they do break from the corporate jobs.

The future may turn out to be just great and rosy. Or it may not. Are you willing to chance it?

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7 Comments

  1. Francoise on February 13, 2012 at 9:52 am

    I have no work pension, I lost $30,000 in savings due to prolonged illness, and I have had no raise in 12 years (thus my real income has declined markedly) , and I can’t leave my job because I need disability insurance and could not get it elsewhere due to my pre-existing condition, and I cannot even meet my expenses in outrageously expensive Toronto, I am truly truly truly terrified for my future. It’s a constant undercurrent of fear and despair. And you could say save, but when you are constantly teetering on the edge of eviction from rent default, saving is not an option. So much for seeing my life go forward; I have only seen it decline and see further decline as I become unemployable and possibly ill. It’s rough road to be part of 99%.

  2. AverageJoe on February 13, 2012 at 12:03 pm

    The “live longer” point is a good one. It’s a common issue in financial planning right now that many plans don’t project people living long enough into the future. I’d hate to show up at 90 only to know my plan had me expiring at 88.

  3. krantcents on February 13, 2012 at 1:52 pm

    I believe in having multiple income streams, so I have a 403B (401K), IRA, Roth IRA, pension, brokerage accounts and Social Security. In addition, I have a side income from a blog.

  4. JoeTaxpayer on February 13, 2012 at 6:50 pm

    Considering the current 401(k) limit is $17,000, it would seem to be able to cover earners up to $100K income, if not a bit higher. If one starts young enough, and invests wisely, 10% should do it, especially if there’s a company match. Why do you feel this annual deposit won’t be enough?

  5. Shailesh Kumar on February 14, 2012 at 10:02 am

    JoeTaxpayer,

    Given the fiscal situation at the Federal level, it is wise for everyone to have greater control on their retirement savings. The Social Security shoe will drop and there will be a restructuring of the tax code. While I do not project the consequence on the 401K program, I would rather not play dice with my retirement.

    Also, I am a huge proponent of investors knowing what they are investing in. 401K plans often offer a pre selected list of choices which may not be the best investments available. I have even seen insurance annuities wrapped in a mutual fund wrapper being offered, which is guaranteed to under perform (for the employee, not so much for the insurance company and the employer) due to their multi level and opaque fee structure.

    But you are right. If you do nothing else, atleast use the 401K option that is available to you, especially if there is a company match.

  6. MyMoneyDesign on February 28, 2012 at 9:20 pm

    Good points about the future! Especially number 3. Usually (myself included) we only think about retirement in terms of ourselves or our family. If debt continues to spiral out of control, soon taxes will be raised and it will cut into everyone’s nest egg.

  7. SE Book on February 29, 2012 at 1:15 pm

    these are great points really has given me some thigns to think about.

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