The world today is vastly from the one that existed in 1974. Smartphones, tablets, and all other technological innovations of today have made our lives more enjoyable and productive in many ways. Yet when it comes to investing for the future — many of us may actually face more challenges today than we might have in the past.
Two factors are responsible for this regression. First, “real” wages (wages after inflation is considered) have been flat or declining since 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.
What can you do to improve your prospects for achieving a comfortable retirement?
In the absence of a formal pension, you will need to consider all the opportunities available to you. If your employer offers a 401(k) or 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. 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).” 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.
Your next main challenge — compensating for stagnant real wages and the subsequent difficulty of boosting your savings — what can you do? 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 will always fluctuate. But you can help control this risk by owning a mix of investments, including stocks, bonds, Treasury bills, certificates of deposit and other securities. Keep in mind, that while diversification can reduce the impact of volatility on your holdings, it can’t guarantee profit or 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. You can still brighten your future — through diligence, discipline and the determination to explore the opportunities available to you.
Information provided by Karl Ritland, Edward Jones, 1100 N. Hickory Blvd., Suite 201, Pleasant Hill, 266-8188, www.edwardjones.com.