The “three-legged stool” approach to retirement – a traditional pension, social security, and individual savings plans – is not necessarily stable anymore. Instead of depending on an increasingly cash-strapped government or pension plans with portfolio managers whose actual investment results may fall short of your anticipated benefits, perhaps it’s time to look inward. Your main source of retirement income should come from your personal savings and investing portfolio.
One of the reasons that people have felt so down about the markets since the tumble in 2008 is because the stability that they had relied upon was suddenly shattered. After all, who expects a bank to go out of business? Understanding that institutions are ultimately run by committees and people with personal interests (sorry to be so cynical), it’s important to put your own needs first when planning for your future. Consider these risks of the “three-legged stool”:
A traditional pension can change. It is not uncommon to read about companies that cut their pensions or are anticipating the need to cut pension benefits in the future. Even in terms of companies that seem rock solid today, there is no guarantee that they’ll remain solid, or even be around in the future. And while it may seem like private pension companies are the cure for the company-based pension, there is no guarantee that your pension company’s actual results will meet their – or your – expectations.
Social security has publicly announced that their funds are in danger of depletion. Indeed, in its 2011 annual report it announced that its expenditures exceeded its non-interest income in 2010 for the first time since 1983. If it analysts are correct, after the late 2030s tax income will only be sufficient to pay about three-quarters of scheduled benefits through 2085. While those years may seem far off, they are potentially relevant for those working today. Where will you be then? And do you think Bituach Leumi is more well-funded?
Individual savings plans are the one thing you can control… sort of. While you can decide how much you will save and where you will place it, you cannot control the stock market. Even so, there are ways that you can minimize potential losses. And, at the end of the day, private savings plans allow you to be in the driver’s seat and determine the level of risk you want to take with your hard-earned money.
There’s no alternative to old-fashioned savings and investing if you want to have a secure financial future. Continue saving and monitoring your investments. But don’t save haphazardly; make sure your savings are part of a comprehensive financial plan. Meet with a qualified financial planner today to help make sure your savings will last during retirement.
Douglas Goldstein, CFP®, investment advisor is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published May 20, 2012.