The best retirement plans are the result of a lot of thought, consulting, and homework. Without a solid plan in place, many people's "golden" years are anything but.
In 2013, Fidelity and Vanguard put out a paper showing that the average baby boomer has just $126,900 saved in 401(k)s. Though Social Security will add to that, those two sources of income combined won't be nearly enough for the average American to live comfortably in retirement.
Indeed, one of the greatest shortcomings of the American public is our inability to plan for the years after we leave the workforce. Though there is no one-size-fits-all plan to solve this problem, there are some general principles that can guide you toward a more financially secure retirement.
A brief history of retirement plans
One of the most important things to acknowledge is that we aren't hardwired to plan a half-century into the future. In our hunter-gatherer days, the tribe provided cradle-to-grave security -- no retirement planning necessary.
Further, according to a study by Merrill Lynch and Age Wave, it wasn't until the 1950s that the average retirement age surpassed average life expectancy. Most people simply didn't live long enough to retire.
Over the past century, retirement planning has gone through several evolutions. First came Social Security, which remains more important to retirees than most realize. In fact, only 10% of retired people have more money in hard assets than they do in terms of guaranteed Social Security income.
Next came defined-benefit plans, or pensions. Typically, these are funded by companies and guarantee a certain amount of income from retirement until death. Though defined-benefit plans were the only retirement plan available to 60% of private-sector employees in the 1980s, they are much less commonplace today.
In their place came defined-contribution plans, which usually take the form of 401(k)s or 403(b)s. Companies set up these accounts and deduct a certain amount from the employee's paycheck to be invested for retirement.
Individuals can also put money away in personal retirement accounts such as Traditional or Roth IRAs. Beyond that, it's not uncommon for people to use life insurance, home equity, and personal savings to help supplement retirement income.
How many retirement plans are there?
This is where things can get confusing. There are as many smart, healthy, financially sound retirement plans as there are folks heading into retirement.
The list of variables that determine what the "best" retirement plan is for you is endless, but the primary considerations include how much money you need to maintain your lifestyle, what your health care needs are, how much you wish to leave to your family, and at what age you wish to stop working full-time.
Some of the most popular investment vehicles for retirement planning are target-date funds, which rebalance their holdings as your desired retirement date approaches. Usually, this means shifting over time from a somewhat aggressive investing style to a more conservative approach.
The plans are so popular that experts believe that by 2020, almost $3.9 trillion in defined contributions -- half of all defined-contribution cash -- will be in target-date funds.
With over 600 different types of target-date funds available, the most important variable to watch is the expense ratio. This represents how much you are paying each year to have your money managed for you. Morningstar reports that the average expense ratio for a target date fund is 1.09%. However, Vanguard, which typically offers the lowest fees in the industry, has target date funds with expense ratios averaging just 0.17%.
Why use a retirement plan?
This article can't even scratch the retirement planning surface. There are simply too many options out there. That's why hiring a licensed, fee-only professional to help tailor a retirement plan that makes sense to you is so important.
The benefits of doing so are clear. The Social Security Administration's most recent report predicts that benefits will be cut 23% by 2034. Pensions and other defined-benefit plans are going the way of the dodo bird. If you want to have a secure and comfortable retirement, the only person you can count on to look after your future is you.
The bottom line on the best retirement plans
Remember, the basics can go a long way toward making the retirement planning process easier. Start as early in your life as you can, spend less than you earn, and invest the difference. Wash, rinse, and repeat. Hire someone you trust to help you navigate the process.
Follow those simple steps, and you'll be saving yourself from both headaches and heartaches down the road.