Once every three years, the Board of Governors of the Federal Reserve System collects data on household assets and liabilities through the Survey of Consumer Finances (SCF). The most recent such survey was conducted in 2007, and the survey results were released to the public in February 2009. I used the most recently published CRS report in writing this article.
Here's how most people plan on funding their retirement:
I. Savings53% of all households owned at least one retirement account in 2007. Among all households that owned one or more retirement accounts, the median balance of all accounts owned by those households was $45,000.
Twenty-five percent of all households with at least one retirement account in 2007 had retirement savings of $140,000 or more and 25% of households with one or more accounts had retirement savings of $11,000 or less.
This level of savings is not going to carry the retiree very far. It will not generate much income, capital appreciation or directly fund retirement expenses for a significant amount of time.
II. Social SecurityMore than 96% of workers in the United States are covered by Social Security. According to the government report "Status of the Social Security and Medicare Programs", Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983.
After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury.
After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year.
Social Security was never intended to provide for 100% of a retiree's post-retirement expenses. With the added funding concerns, there will be added pressure to lower future benefits.
III. Defined Benefit PlanAccording to the government report "The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers", the percentage of workers covered by a traditional defined benefit (DB) pension plan that pays a lifetime annuity, often based on years of service and final salary, has been steadily declining over the past 25 years.
From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent (Bureau of Labor Statistics 2008; Department of Labor 2002). These trends threaten to shake up the American retirement system as we know it.
IV. Defined Contribution PlanA defined contribution (DC) plan is an investment account established, and often subsidized by employers, but owned and controlled by employees. In this plan the worker bears the risk of investment losses.
The worker’s account balance at retirement will depend on how much has been contributed to the plan over the years and on the performance of the assets in which the plan is invested.The percentage of workers covered by a DC pension plan as been increasing over time. From 1980 through 2008, the proportion of private wage and salary workers participating in only DC pension plans increased from 8 percent to 31 percent (Bureau of Labor Statistics 2008; Department of Labor 2002).
Unfortunately, many DC plans limit your investment options to index funds that sometimes carry very high fees. As we have seen, markets can go sideways for a decade or more, putting DC plans in jeopardy of providing retirees with an under-funded retirement.
V. Net WorthMany households have other assets that could be used to pay expenses during retirement. For example, the most valuable asset owned by many families is their home, and some may find when they are older that they prefer to live in a smaller house or apartment, or they may choose to move to an area where property taxes and other living expenses are lower than where they lived during their working years.
This can be a scary way to fund retirement. What happens if you run out of assets before you run out of life?
Build Your Own Pension Plan With Dividend StocksIf I am responsible for my future financial security, then it is to my utmost advantage to carefully select a strategy that will succeed. Personally, I am doing several different things, but my ace in the hole is a growing portfolio of dividend growth stocks such as these:
Abbott Laboratories (ABT) | Yield: 3.6%
Abbott Laboratories is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.
Chevron Corporation (CVX) | Yield: 3.1%
Chevron Corporation is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals.
The Coca-Cola Company (KO) | Yield: 2.8%
Coca-Cola Company is the world's largest soft drink company, and it also has a sizable fruit juice business.
Johnson & Johnson (JNJ) | Yield: 3.5%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.
McDonald's Corporation (MCD) | Yield: 2.8%
McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,900 restaurants in 117 countries.
Procter & Gamble (PG) | Yield: 3.2%
The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.
Wal-Mart Stores, Inc. (WMT) | Yield: 2.7%
Wal-Mart Stores, Inc. is the largest retailer in North America. Wal-Mart operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.
Because the majority of assets held in retirement accounts are invested in stocks, trends in stock prices have a significant impact on households’ retirement account balances. As a result of the broad decline in stock prices in 2008, the retirement account balances that households reported in the 2007 report may be greater than many of those households would report today.
The uncertain future of Social Security and the declining prevalence of defined-benefit pensions that provide a guaranteed lifelong income have put much of the responsibility for preparing for retirement directly on workers. Are you working to build a secure future?
Full Disclosure: Long ABT, CVX, KO, JNJ, MCD, PG, WMT. See a list of all my dividend growth holdings here.
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