Q. Since many millenials are working for companies offering no pensions, would it be wise to get an annuity that could act like a pension?
— Wish I had one
A. There are very few pensions to find these days.
You’ll still see them for public sector employees, but fewer and fewer companies offer pensions.
Only 17 percent of those employed by the private sector are covered by a defined benefit retirement plan or pension, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge, based on data from the Bureau of Labor Statistics.
In the government sector, 86 percent of workers may be entitled to a benefit when they stop work, she said.
Add it all together and about 23 percent of workers can expect to receive a long-term payment from an employer upon retirement, a number that has fallen precipitously since the 1970s when the 401(k) was created by the Revenue Act of 1978, Mott said.
So it’s not just the millennial generation – those born between 1981 and 1996 and now ages 23 to 38 – who are going to be responsible for their financial future in retirement, Mott said.
She said Generation X, many Baby Boomers and lots of those just entering the workforce will need to use an investment vehicle such as a 401(k), 403(b) or IRA to put aside the dollars that will support them upon entering retirement.
“Making the most of pre-tax retirement savings by participating in an employer-sponsored plan such as a 401(k), 403(B) or 457 should be the first priority for anyone who is not going to be receiving a pension benefit from their company,” she said.
Should the opportunity exist, even those who are likely to get pension payments may still want to consider setting aside additional dollars because the benefit they receive may fall far short of their income needs down the road, she said.
“When deciding how much to set aside from each paycheck, it’s essential to contribute enough to receive any available employer match so as not to miss out on that `free money,’” she said. “However, it is also important to be aware of how much contribution the budget can handle.”
Before making a commitment, track living expenses for a few months to get a sense of how much month-to-month income is needed to pay the bills, she said. If dollars are available after expenses, consider how much can be set aside as a regular contribution.
For 2019, the maximum contribution that an employee can make to a plan such as a 401(k) is $19,000 with an additional $6,000 in catch-up available to those age 50 and over, she said.
In the event an employer-sponsored plan is not available, opening a traditional IRA would be another option to consider, Mott said.
For 2019, up to $6,000 can be saved in an IRA (either traditional, Roth or a combination of both), with an additional $1,000 catch up contribution available to those age 50 and over. This contribution will be tax deductible for those who meet the income limitations and plan coverage requirements, she said.
Annuities can be a source of guaranteed income and may be worth considering as retirement age approaches, Mott said.
“They can be used to reduce the risk that exists in a retirement account which is invested in the capital markets and provide a more predictable stream of income,” she said. “However, it is extremely important to understand all of the fees, riders and income guarantees that are embedded in the contract.”
So we’re guessing you may be on the young side to consider an annuity. Consider talking about it with a financial professional who can evaluate your overall financial situation.
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