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 2013, and the survey results were released to the public in 2014. I used the most recently published CRS report in writing this article.
Here's how most people plan on funding their retirement:
Ownership of retirement accounts—including individual retirement accounts (IRAs), Keogh accounts, and certain employer-sponsored accounts, such as 401(k), 403(b), and thrift savings accounts—fell below 50 percent in 2013, continuing the downward trend also observed between the 2007 and 2010 surveys 53% of all households owned at least one retirement account in 2007. The conditional median value of retirement accounts was $59,000 in 2013
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 SecurityMost 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’s total expenditures have exceeded non-interest income of its combined trust funds since 2010, and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period.
The Trustees project that this annual cash-flow deficit will average about $76 billion between 2015 and 2018 before rising steeply as income growth slows to its sustainable trend rate after the economic recovery is complete while the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.
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:
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 54 consecutive years. Yield: 2.8%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 60 consecutive years. Yield: 2.7%
Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 44 consecutive years. Yield: 3.6%
Exxon Mobil Corp. (XOM), formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company. The company has paid a cash dividend to shareholders every year since 1882 and has increased its dividend payments for 33 consecutive years. Yield: 3.4%
3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 58 consecutive years. Yield: 2.6%
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 JNJ, GPC, ABBV, XOM, MMM in my Dividend Growth Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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(Photo: Steve Woods)
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