Baby boomers are getting older, and as more and more retire every year, the Great Lakes State is seeing a shift in retirement plans.
In 1988, 63 percent of full-time workers had a pension and 45 percent had a 401(k), according to the U.S. Department of Labor. In 2007, 32 percent had a pension and 53 percent had a 401(k).
Noah Morgan, MBA, CFP, and private wealth advisor at Acorn Wealth Advisors, said, “Most companies that are hiring today and almost all publicly traded companies have some sort of defined contribution, also known as, 401(k) plan where employees can save up to $19,000 per year and if over age 50
they can save an additional $6,000 catch up. Plan costs have come down significantly through the advancement of technology and online applications.”
Pension plans are defined benefit plans in which an organization makes a promise to pay a specific amount of money to an employee during retirement, according to Greenbush Financial Group. These are becoming less popular than defined contribution plans, such as a 401(k), in which the employee, and sometimes the employer, will put money aside that will accumulate over time for the employee once they retire.
Morgan said, “People really need to ask themselves— do we really want to depend on our company to help them save or can they take a more independent approach?”
One reason there’s a shift from defined benefit plans toward contribution plans is that baby boomers are living longer and the plans are becoming too expensive to fund.
This shift in retirement plans forces younger generations entering the workforce to take an active role in planning for their future.
“Michigan has always been a great state to live, work and play, especially given our generous labor relations packages that created pensions for many automotive, union, state and municipal workers. During periods of economic boom and surplus in tax revenues, it was easy to set up plans that gave employees a check on the first of every month for the rest of their life once they retired,” Morgan said.
However, many of these programs are underfunded.
Individual retirement accounts (IRAs) are also becoming more popular and accessible due to new technology and online financial services. The average American can save $6,000 a year in an IRA, and those over 50 can save an additional $1,000.
Even with a 401(k), an IRA and Social Security, people in their 40s and 50s, and younger, will either have to save aggressively or work longer to “live the lives of their parents,” Morgan said.
“The problem is Americans have to decide whether they want to lease a new car for $500 a month or plan for a long retirement. The average household income in Fenton, believe it or not but according to Census data, is $49,575 annually. So saving $6,000 a year would equal a 12 percent savings rate of income,” Morgan said.
If a family saved $6,000 a year for 30 years, they’d be able to accumulate $505,268 if they earned a 6 percent rate on their investments.
More and more Americans are putting away money in individual saving plans compared to previous years. In 2016, of those 55 and older, 48 percent had no money saved in a 401(k)-style plan or individual retirement account, according to the U.S. Government Accountability Office. While that number is low, it’s an increase from 52 percent in 2013.
“It is a beautiful thing when savings becomes an automated habit in our lives and we can live on our net income,” Morgan said.
Michigan’s aging population
• The U.S. Census shows that in 2016, 23 percent of Michigan residents were 60 or older, a significant increase compared to past decades.
• In 1930, 5.2 percent of Michigan’s population was 65 and older. By 1980, that number increased to 9.8 percent, and in 2010, it was 13.8 percent.
• Genesee County has similar percentages. In Genesee County, 15 percent of the population was 60 and older in 2000. From 2012 to 2016, that number increased to 22 percent.