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Where Did Pensions Go?

Where Did Pensions Go? Fitzwilliams Financial

Before 1978, most retirement plans were set up as pensions. Although the term “pension” can colloquially refer to any kind of retirement account, usually what is meant by “pension” is a defined-benefit plan.[1] “Defined-benefit plan” is a technical term for a retirement plan where an employer guarantees payment of a certain amount when you retire based on how long you worked at the company and what your salary was at that job.[2] With pensions, the burden of risk in setting you up for retirement was entirely on your employer because they were required to pay you an agreed-upon amount at retirement regardless of the pension fund’s return.[3]

So, what changed in 1978? Congress passed the Revenue Act of 1978. This act added a provision to the Internal Revenue Code called “401(k).”[4] This provision added a new tax-advantaged way for employees to defer a percentage of their compensation to avoid taxation.[5] The name of that provision is actually the origin of the term “401(k).”[6] After the introduction of the Revenue Act of 1978, a benefits consultant named Ted Benna developed a retirement plan based on that 401(k) provision.[7] After a few years, many major companies were offering 401(k) plans, and the 401(k) took off as one of the most popular retirement plans in the country, replacing pensions and altering the retirement landscape.[8]

So, what’s different with a 401(k)? A 401(k) is what’s called a defined-contribution plan.[9] This kind of account is primarily employee-funded, although it is possible for employers to make contributions to these kinds of accounts as well.[10] The employee is not guaranteed a specific payment on retirement–rather, they are allowed to set up an investment account themselves which has a tax-advantaged status that they are allowed to access when they reach 59 ½ (and in some cases, 55).[11]

Regardless of what kind of accounts you have, it’s not always clear how best to use them to maximize your retirement. If you’re curious about what a financial professional can do for you, reach out to us today for a complimentary review of your unique financial situation.

 

When people think about retirement planning, they often focus on one question: How much money will I need?

I believe another question can be just as important: What will that money be able to buy?

Inflation can gradually change the cost of groceries, housing, healthcare, transportation, travel, and many of the other expenses people may encounter throughout retirement. As those costs change, the purchasing power of a dollar may change with them.

That is why retirement planning can involve more than building an account balance or reaching a particular savings target. A comprehensive financial plan may also need to consider future

spending, retirement income needs, time horizon, inflation, investment strategy, and how someone’s financial circumstances could evolve over time.

In this Financial Forecast discussion, I explore how inflation can affect everyday expenses and why purchasing power may matter when evaluating a long-term retirement strategy. I also discuss why investors may benefit from looking at their financial decisions within the broader context of their goals rather than focusing on any one economic factor in isolation.

No one can know exactly what prices, markets, or economic conditions will look like years from now. Planning can instead involve evaluating different possibilities and building a strategy that may be able to adapt as circumstances change.

Watch the video to learn more about how inflation and changing expenses can fit into the retirement planning conversation.

Fitzwilliams Wealth Management, Inc. is an SEC registered investment advisor. FWM and Fitzwilliams Financial are affiliated companies. The content in this video is for informational purposes only and is not personalized investment advice or a solicitation to buy or sell any security. We do not provide tax or legal advice. Media appearances are for informational purposes only and do not constitute an endorsement. Investing involves risk.
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