It's no secret that the world of retirement has changed dramatically over the past few decades.
According to the Center for Retirement Research at Boston College, if you were an employee back in 1983 and your employer offered a retirement plan, there was an 88% chance that at least part of it was a traditional pension plan offering some amount of guaranteed income in retirement.
This was the kind of benefit that our parents and grandparents grew up with and prompted their advice to "find a good job with a good company and work your way up."
But the numbers -- and the times -- have changed.
By 2010, only 32% of employer-provided retirement plans included any kind of traditional pension. The dominant retirement plan today is the 401(k), which does away with employer guarantees in favor of employee contributions.
What does that mean for you? That you are increasingly dependent on your own savings when it comes to retirement income. Or, said another way, you're in complete control of your own destiny.
For the unprepared, it's a little scary. There are fewer guarantees, fewer safety nets to fall back on. Gone are the days where you found a big company, started at the bottom, kept your nose down for 40 years, and retired with a big fat check coming every month from your employer.
But for the prepared, there are more opportunities than at any other point in history. With the right planning, you can define "retirement" just about any way you want.
And that's pretty exciting.
The New World of Opportunity
It's easy to use these statistics to paint a picture of doom and gloom. And it's true that, for older generations especially, this is a scary shift. With less time to react to all the changes, they're left with fewer options.
But for younger generations, for members of Gen X and Gen Y, this new reality presents a huge opportunity. You now have more freedom to choose your own path and create your own version of retirement.
Let's compare the old world of retirement to the new world so you can see exactly what I'm talking about.
The Old World
In the old world of traditional pension plans, your retirement benefit was primarily based on two things:
- Your average salary
- How long you worked for your company
The path to a secure retirement was laid out for you: find a big company, stay there for 40 years, and slowly work your way up the ranks. Pretty exciting, huh?
Older generations seem nostalgic for this clear-cut, no-deviations-allowed path to retirement. But there were some big downsides to the old school system:
You were tied to your employer – The old golden handcuffs. In some cases you might have had to work for your employer for at least 5 years before you saw any benefit at all. Other employers offered incentives to provide bigger benefits the longer employees worked for the company. If you wanted to leave and try something else, you were potentially forfeiting a huge amount of retirement savings.
You had to accept whatever benefits your employer provided – Your employer created the plan that determined how much retirement income you could earn and how long it would take you to earn it. You had to accept whatever they offered. And if that offer changed 10, 20, or even 30 years into your career at your company... well, you just had to live with it.
"Retirement" meant the same thing for everyone – Finish school, work full-time until age 65 (therefore earning maximum benefits), and spend your remaining years in retirement. With traditional pension plans, that was basically your only route. There was little room for individual choice.
The New World
In the new world of employee-led retirement planning, your retirement benefit is primarily based on two things:
- How much you can save
- How quickly you can save it
There are fewer guarantees and the path to retirement is less clear. But there are some big advantages that this new system has over the old one:
You are not tied to your employer – When you put money into your 401(k), that money is yours forever. The same is true for an IRA or a regular brokerage account.
You can change jobs, start a company, or take an extended sabbatical and that money will stay with you through all of it (with proper planning). You have more freedom to try different things and find the work you truly love without sacrificing your retirement savings.
Quick note: if you're self-employed, you can learn more about your options for retirement planning here.
You get to decide on your own benefits – Your employer no longer controls your benefits. You do.
Want to save 25% of your income? You can retire in 32 years instead of 40. How about 50% of your income? You can cut that down to 17 years. An employer-led retirement plan certainly wouldn't want you to have those options, because it would mean higher turnover rates for good workers.
But in the new world of retirement where workers must take charge and take control of their own retirement savings, we do have those options.
You get to define "retirement" for yourself - With your retirement savings in your own hands, you get to define the word "retirement" for yourself. If you want to stick with the traditional "work till 65" definition, you can certainly do that.
But maybe you want to retire early. Or maybe you just want to work fewer hours so you can spend more time traveling, or with your kids, or on whatever it is that interests you.
Now that your savings are based on the amount you can save instead of the years you can work, you have the opportunity to make those kinds of choices. "Retirement" is no longer a definition. It's whatever you want it to be.
How Can You Make the Most of This New World?
With great power comes great responsibility. There are a lot of exciting possibilities in this new world, but that doesn't make it easy to take advantage of them. If you want to make the most of it, you're going to have to do two things really well:
1. Define What It Is You Want
This one sounds easier than it actually is. Life is simple, if not incredibly exciting, when the path is laid out for us.
But once we're given free range to choose our own adventure, it can be a little scary and overwhelming to try and figure out what exactly a happy and fulfilling life looks like to us.
There's obviously no right answer here. It depends on your specific goals, values and desires.
And it's also not a static answer. What you want out of life will change as you get older and your plans will have to change with that.
But here are some questions to help you get started:
- What do you want your family to look like? Will you have children? If so, how many?
- Do you want to be working? If so, what would you like to be doing?
- What would your daily schedule look like if you could set it however you wanted?
- What kinds of things would you do for fun? How much of your time would be dedicated to these things?
- Which people would you see on a regular basis?
The answers to these questions will help you start setting clear goals, and those goals will form the basis of your plan.
2. Plan Ahead
The people who will thrive in this new environment are the ones who recognize the opportunities and make a plan to take advantage of them. The more proactive you are with your planning, the more choices you'll have down the line.
Which means you need to start answering questions like:
- How much money do you need and when do you need it?
- How much should you be saving?
- How can you manage your expenses better to hit that savings goal?
- How should you invest and in what types of accounts?
This is where it can really pay off to have a trusted advisor at your side to help you understand your options and figure out which route is best for your specific goals.
The World is Yours
In this new world, your retirement is in your hands more than it ever has been before. This places a bigger burden on you to take charge and make smart decisions. But it also gives you more opportunity to do things the way you want.
How are you going to take advantage?
About the Author: Matt Becker is the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple. His free time is spent jumping on beds and building block towers with his two awesome boys.