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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 4 A Savings Goal for Retirement

In the “old days,” 20 or 30 years ago, many companies where Americans worked offered pensions to their employees for their retirement years. As explained in Chapter 1, these so-called “defined benefit” pensions were usually guaranteed for life. Some were even indexed to inflation, so that pension income rose along with the cost of living. The companies themselves had to bear all of the risks of maintaining these pensions. If markets were booming, a company could lighten up on its payments to its pension fund. But if markets performed poorly as in the last decade, the company was forced to increase payments to the fund. As a result, many companies chose to get out of this pension fund business. The traditional defined benefit pensions have been replaced for many workers with “defined contribution” pensions that require workers to save for their own retirement.

It should be noted that even in the heyday of defined benefit pensions, only a fraction of Americans were covered by these conventional plans. So the “old days” may be somewhat mythical for many Americans who have always had to save for their own retirement. That has certainly been true for most small business owners, including farmers. Nonetheless, traditional pensions are far less important today that they were 20 or 30 years ago. Americans are increasingly on their own in saving for their retirement.

Employers sponsoring defined contribution plans such as the 401(k) do often “match” ...

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