Another Defined Benefit Plan Eliminated
By Mel Lindlauer
June 28, 2013
The beat goes on. Corporate America continues its relentless shift away from defined benefit plans and toward defined contributions in helping workers prepare for retirement.
Recently, American auto maker Chrysler announced it was going to freeze its pension plan for about 8,000 workers, transferring them to a defined contribution plan starting in 2014.
Are those 8,000 workers up to the challenge? Are you? [EXPAND Read more]
In the good old days, corporations across America basically provided retirement funds for their employees. Once retired, the paycheck you received was based on a number of factors, including length of employment and performance level within the company.
That made it easy for workers. At retirement, you knew exactly how much money was deposited to your bank account each month, so you knew exactly how much money you could spend each month.
Essentially, that was the core of your financial planning – your saving and spending decisions.
All this started to change in 1982, when 401-k plans began appearing en masse across the workplace landscape. Company after company started telling their employees . . .
“No longer are we taking care of you throughout retirement. We are going to set you up with a tax-deferred retirement account and we might match a few dollars, but basically you are on your own.”
“You decide whether or not you want to participate in the plan.”
“You decide which mutual funds are best from the smorgasbord of funds provided.”
“Once retired, you decide how fast you want to draw down your portfolio, and if you outlive your portfolio, well, that is your problem, not ours.”
The result? Workers across America started turning away from a focus on monthly saving and spending decisions and began to track five-star funds and tune in to 24-hour financial networks, thinking that these things were somehow more important in achieving retirement financial goals than saving and spending decisions. They aren’t.
It’s time to return to what is REALLY important in reaching financial goals; your saving and spending. These are the personal decisions you make in your everyday life that will have a profound impact on your financial well-being throughout your retirement years.
It starts with following three simple principles that we already know to be true.
Don’t put all your eggs in one basket. Diversify across asset classes that reflect your need and ability to take risk, and then methodically adjust this allocation as you grow older and your saving years turn in to your spending years.
There is no such thing as a free lunch. Because capital markets are relatively efficient, any efforts to beat the market are likely to be futile. Capture the return (less fees) of each asset class through low-cost index funds.
Save for a rainy day. A straightforward financial plan provides clarity on how much you need to save while working, and how much you can spend when retired, so that you don’t exhaust your financial resources.
The benefit of embracing the first two principles is that it allows you to focus all your attention on the third principle, which is what you should be doing all along, and what being a Boglehead is all about. [/EXPAND]