Is the traditional retirement plan reaching its end? This traditional plan is based on the concept of the “three-legged stool,” which consists of workplace pensions, Social Security retirement income and personal savings built up over a lifetime. Unfortunately, for many Americans, that stool is starting to deteriorate.
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The Waning of Traditional Retirement Funds and Concerns with Social Security
Some workplaces might offer a choice between a traditional workplace pension plan and another type of retirement savings option. With a traditional pension plan, your retirement income would be based on how long you’ve worked and your average salary. Alternatively, you might be able to contribute a portion of your salary to tax-deferred retirement accounts like a 401(k), 403(b), or 457(b).
According to a report by the Congressional Research Service, an estimated 86% of public sector workers receive benefits through a defined benefit (DB) plan, in stark contrast to the 15% of private sector workers who have access to such a plan.
Some experts argue that switching from DB to DC plans puts the responsibility for building a sustainable investment fund on the shoulders of the employees.
Almost one in 10 gig workers, or more than 17 million Americans, rely on these gigs, such as temp agency work, on-call work, contracted work, and freelancing, as their primary means of earning a living.
Almost 6 in 10 Americans who are still working anticipate relying on their Social Security benefits to cover their retirement expenses. Yet, because the country’s Social Security trust fund is forecasted to deplete itself by 2035, placing sole reliance on it may not be the most prudent financial strategy. Although your Social Security benefit won’t evaporate, it could significantly decrease.
The cost of living in the United States has become unaffordable.
Dogen explains how he escaped the daily routine and achieved early retirement with the help of this innovative three-legged stool:
Tax-advantaged savings
Retirement savers rely heavily on tax-advantaged vehicles, like 401(k)s and Roth IRAs, and the top priority is typically to contribute as much as possible to these accounts, according to Dogen.
If your company matches your retirement contributions, consider contributing enough to receive the full match each year. This is essentially free money. Additionally, you’ll receive tax benefits when you contribute or withdraw your savings in retirement, depending on the type of retirement savings account you have. Generally, withdrawals before age 59 ½ are penalized, but this also helps you avoid using the money while it has time to grow with compound interest.
of up to $11,250.
Taxable investments
Dogen advises building a diversified portfolio of taxable investments to generate wealth. He recommends positioning your taxable investments to grow significantly, ideally doubling or tripling the value of your retirement accounts, by the time you reach age 60.
That could involve opening a brokerage account, where you can buy and sell stocks, bonds, and exchange-traded funds (ETFs). Investing in real estate, farmland, commodities, or collectibles is also an option. Keep in mind, though, that any gains you make will be subject to capital gains tax. On the other hand, you won’t have to part with this money until retirement, allowing for more flexibility – you could also generate extra income through stock dividends or rental income.
The key factor to create more income opportunities.
Do you want to be working on something, either before or after your main job, that can potentially earn you money,” said Dogen, referring to this as the “X factor”. “It could be a part-time venture or an entrepreneurial endeavor, or rather, every person has a skill – you can share that skill with others.
This additional income could be invested in stocks and retirement accounts, as well as potentially opening doors to new possibilities. Pursuing a side business centered around a skill or hobby can provide financial stability and a sense of personal fulfillment. “Since this is something you enjoy, you become more skilled at it, which can be very fulfilling,” he noted.
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This article supplies information and should not be seen as guidance or advice. This information is given without any guarantees or promises of any kind.