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The surge in baby boomers coming to retirement age will undoubtedly cause a strain on Social Security. With life expectancy increasing dramatically in the last century, the overload of government-subsidized pensions is a source of worry.The organisation for Economic Cooperation and Development (OECD), in a recent review of the outlook of pensions in 34 countries, emphasised the importance of workers continuing to work past retirement age and said we can expect smaller government-subsidized pensions. That is why it is crucial to plan for retirement using as many vehicles to diversify as possible.
The OECD’s report says that the crisis has accelerated the pace of pension reform in OECD countries. “Much has been achieved, but much remains to be done,” according to the report. In order to prepare for the overload of retirees, 13 countries are already increasing the pensionable age to 67, and 14 states are putting restrictions on early retirement.
The Pension Gap
The problem is that there is a pension gap. Many countries – about a dozen – have a replacement rate of less than 60%. This means that many countries are not able to handle the surge of retirees when their time comes to get paid. Therefore, the OECD stated that, “private pension provisions should be promoted to allow workers to draw on their savings in old age, complementing their working income and public pension benefits.” Some countries are not backing this idea because they worry that the retirement contribution made by employees will be considered a tax. To alleviate this fear, the OECD came up with the idea of enabling people to opt out of retirement savings.
The private pension idea was well received when it was first introduced in New Zealand in 2007, with opt-out rates as low as 20%. Britain will be initiating a private pension scheme between 2012 and 2017. The OECD thinks other countries will also take part in private pensions. The main concern with these private pensions is investment risk. Some countries are thinking of implementing guarantees during the fund accumulation phase.
How to Plan
During the working years, we all know that we should put at least 10 to 15% of our gross income towards savings, but unfortunately many of us are not doing this. That is why careful budgeting is essential while we’re still in our productive years.
Here’s a brief summary of retirement planning. The three phases of retirement planning are accumulation, consolidation and distribution. The accumulation phase is where we work and gather up our funds. This occurs mainly between the ages of 30 and 55. The consolidation phase is where we become a bit more conservative in our investments and tend to restructure our portfolio towards more safe and stable investments. The distribution phase is when we live off our investments.
The Bottom Line
Long-term planning for retirement is crucial for survivor ship during our non-working years. In light of the concern that comes with retirement, where countries won’t have enough to cover costs, do you think a private pension should be made mandatory?
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This story was originally published by Investopedia.
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