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 2016, and the survey results were released to the public in 2017. I used the most recently published CRS report in writing this article.
Here's how most people plan on funding their retirement:
I. Savings
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--rose to 52 percent in 2016, following a period of decline between the 2007 and 2013 surveys. Median values of retirement accounts, however, were little changed, remaining at about $60,000 in 2016. he conditional mean value rose 10 percent to $228,900 in 2016.
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 Security
Most 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 Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund, which pays disability benefits, are by law separate entities. The Trustees project that the combined trust funds will be depleted in 2035, one year later than projected in last year’s report. The projected 75-year actuarial deficit for the OASDI trust funds is 2.78 percent of taxable payroll.
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 Plan
According 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 Plan
A 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 Worth
Many 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 Stocks
If 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 56 consecutive years. Yield: 2.7%
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 63 consecutive years. Yield: 2.9%
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 37 consecutive years. Yield: 4.5%
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 61 consecutive years. Yield: 3.4%
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, XOM, MMM in my Dividend Growth Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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