The world of today is vastly different from the one that existed in, say, 1974. Innovations such as the Internet, smartphones, tablets, Facebook, Twitter and so on have made our lives more enjoyable, efficient and productive in many ways, and have vastly improved our access to the world’s knowledge. Yet when it comes to one important area of our lives — investing for the future — many of us may actually face more challenges today than we might have in the past.
At least two main factors are responsible for this apparent regression. First, following a quarter century during which U.S. workers’ income rose fairly steadily, “real” wages — that is, wages after inflation is considered — have been flat or declining since about 1974, according to the Bureau of Labor Statistics. Secondly, during this same time period, we’ve seen a large drop in the percentage of private-sector workers covered under a “defined benefit” plan — the traditional pension plan in which retired employees receive a specified monthly benefit, with the amount determined by years of service, earnings history and age.
So unlike your counterparts in the 1950s and 1960s, you may not be able to count on a rise in real wages, and you may not have the promise of a regular pension. What, then, can you do to improve your prospects for eventually achieving a comfortable retirement?
First of all, in the absence of a formal pension, you will need to create your own retirement plan. That means you will need to consider all the opportunities available to you. If your employer offers a 401(k) or similar account, such as a 403(b), contribute as much as you can afford — at the very least, put in enough to earn your employer’s matching contribution, if one is offered. And even if you participate in your employer’s plan, you may also be eligible to open an IRA. If you’re self-employed, you still have options such as a SEP IRA or a “solo 401(k).” While these accounts may differ from each other in terms of eligibility, income restrictions and contribution limits, they both offer the same key benefit: the ability to defer taxes on your earnings for many years, typically until retirement.
As for your next main challenge — the need to compensate for stagnant real wages and the subsequent difficulty of boosting your savings — what can you do? For one thing, you will need a reasonable percentage of your portfolio — both inside and outside your IRA, 401(k) and other retirement plans — devoted to growth-oriented investments. It’s true that the value of growth vehicles, such as stocks and stock-based instruments, will always fluctuate. But you can help control this risk by owning a mix of investments, including stocks, bonds, Treasury bills, certificates of deposit (CDs) and other securities. Keep in mind, though, that while diversification can reduce the impact of volatility on your holdings, it can’t guarantee profit or always protect against loss.
As far as attaining rising wages and enjoying guaranteed retirement payments, we don’t have the “certainties” that many people had in the 1950s and 1960s. But you can still help brighten your future — through diligence, discipline and the determination to explore the opportunities available to you.
Craig Johnson, AAMS®
513 Oak Avenue
Sulphur Springs, TX 75482