Aug 4, 2016 4 min read

This is the first installment of a three-part series on preparing for retirement.

Today’s retirement is much different than it was when our parents quit working. Earlier generations often worked for one company their entire career. When they reached retirement, earlier generations usually had a three legged stool to fund retirement. One leg was a defined benefit pension. This would provide a certain amount of money every month for the rest of their lives. It was often based as a percentage of yearly income. The company assumed all of the risk for making contributions and investment performance.

The second leg was Social Security. This was funded by joint employee and employer contributions. It also provided a lifetime income for the worker and his or her spouse. The third leg was personal savings. In this bucket, the employee was solely responsible for contributions and investment earnings.

Only a minority of people owned, stocks during our, parents and grandparents working time. Since the companies and the government took all of the risk to provide promised benefits, individual workers were not involved in the decision-making process. This model worked for many years because most companies only faced domestic competition, so costs were basically the same for all auto or steel companies.

Then the world started to change and new competitors from overseas competed with lower operating costs. This forced companies to find ways to be more competitive with this lower cost competition. One of their choices was to reduce the cost of providing retirement benefits. They did this by switching to defined contributions and shifting investment risk to the employees.

This further evolved until today where most private employers are only offering 401(k) plans. Employees defer some of their current income into the plan in return for a tax benefit. Sometimes the companies provide a match up to a certain level. Employees then select from mutual funds or other investments, hoping to grow their retirement balances. With this evolution, many Americans became investors in the stock market.

Suddenly, common citizens were interested in how the market was performing. Their interest was followed with an explosion of news in newspapers, the internet and financial television networks. While these changes provided new opportunities, they also created new challenges. People were now in charge of how prosperous their retirement would be. If you do not save enough, you are limited in what should be your expectations. If you took too much risk, you could lose everything and if you were too conservative, you might not keep up with inflation.

The need for financial education is greater now than any time in our history. Unfortunately, many people are not exposed to these issues while completing formal education programs.

A 401(k) plan was never intended to be the sole source of retirement income. Originally, it was used by highly compensated executives to defer bonuses. After the IRS clarified the rule, it became the norm for private industry employees.

Today, most of the workers who are covered by defined pension plans are government employees. But for nearly everyone else, the change to defined contribution plans is here to stay, so it is imperative you understand how these plans work and what you must do to achieve your best possible retirement.

This column is now scheduled to appear every other Friday in the Observer Reporter. In the next installment, we will discuss the steps that you need to take and give you the information you need to make the best choices for your family.

Gary Boatman is a Monessen-based certified financial planner. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com