Saving for retirement has never been easy. It requires a well-crafted strategy and the discipline to stick with that plan for the long-term. But how we build wealth has changed dramatically over the past 30 years. And while our parents did have some nice advantages back in the day, these really are the good old days of personal investing --thanks largely to the internet.
Here’s how things have changed since you were recapping last night’s episode of “The A-Team” with your friends over lunch in the school cafeteria.
Social Security – Believe it or not, in the 1980’s retirees could almost live on just their Social Security checks. In 1985, Social Security provided 65% of the average retiree’s income. Today, that figure is just 27%.
Pensions -- Many employees retired with a nice pension to fund their retirement. In 1980, 46% of private sector workers were covered by a pension plan. By 1990, that figure was down to 43%. Today, just 19% of companies offer pensions, and that figure is shrinking fast.
Health benefits – In the 1980s, many employers provided retiree health care benefits. Not so, anymore. While Medicare covers a lot of expenses, today’s retirees are on the hook for a lot more medical costs than the previous generation.
Life expectancy – Today’s retirees can expect to live to 91, women to 94. That’s about 10 years longer than back in the 1980’s. Living longer requires more money. It also means another decade during which the retiree’s nest egg is at risk of a bear market or significant inflation.
All these changes have put more responsibility and pressure on you to create and manage your retirement nest egg. Fortunately, we have a lot more tools available than they did back in the 1980s.
401k plans – The 401k debuted in 1981 and quickly became the cornerstone of employee retirement savings as pensions began to fade away. Money contributed to a 401k is deducted from your taxable income for that year and is not taxed until you withdraw it during retirement. Many employers match a portion of their employees’ 401k contribution. The program has proven wildly popular with both employees and employers, who saw a dramatic drop in the cost of offering a retirement program as compared to pensions.
Mutual Funds -- Purchasing a share in a mutual fund allows the investor to tap into the growth and/or income of several companies owned by that fund. While mutual funds debuted in the 1920’s, they exploded in popularity during the stock market boom of the 1980’s. No-load funds and the index funds created by John Bogle in the 1970’s helped fuel that popularity. Today, there are about 10,000 mutual funds available and they are a staple of holding of 401k accounts.
Lower brokerage fees – It used to be very expensive to buy or sell stock through a broker. A 1992 report found that full service brokers often charged a 2.5% commission for a stock trade. The internet completely disrupted that model. It’s now quick and easy to find an online broker who will charge a flat fee in the $10 range to make a trade.
Information – The rise of the internet has given individual investor free and easy access to all sorts of data, from real-time stock quotes and market information to the latest SEC reports from publically traded firms. Some of this data, including real-time market data, was nearly impossible to obtain before the web. Corporate reports often had to be requested from the company, which would then snail mail them to the prospective investor.
In addition to delivering hard data, the web is packed with thoughtful analysis and insight that can help educate investors, and inform their choices. Of course, the internet is also full of financial silliness and self-serving nonsense. It’s up to use to decide which is which as click and scroll through this brave new world of personal investing.
It’s not your father’s retirement plan, that’s for sure.