The current retirement system in the U.S. heavily relies on individual investment accounts such as 401(k)s and IRAs. These accounts are subject to market volatility, which can significantly affect the income they provide to retirees. As a result, many retirees face the risk of insufficient income, particularly during periods of market downturns. For instance, some individuals experienced a 20% loss in their portfolios in 2022, just before retirement 1.
The Safe Withdrawal Rate (SWR), commonly recommended at 4%, may not be sufficient for many retirees. This rule suggests withdrawing 4% of the retirement portfolio in the first year and adjusting for inflation thereafter. However, it assumes favorable market conditions and a balanced portfolio, which may not always hold true. Consequently, retirees may find themselves at risk due to inadequate protection against market fluctuations and low returns.
Historical Context: Shift to 401(k) Plans
The shift from traditional pension plans to 401(k) plans began in the 1980s. This transition was driven by several factors, including changes in corporate structures, the complexity of managing pension funds, and a desire to reduce costs by transferring investment risk to employees. The 1978 Revenue Act facilitated this shift by allowing employees to make voluntary, pre-tax contributions to retirement plans, leading to the popularity of 401(k) accounts 1.
Comparison with the Swiss Pension System
The Swiss pension system offers a more stable and higher payout structure compared to the U.S. system. It consists of three pillars: social security, occupational pension plans, and voluntary private savings. The second pillar includes mechanisms for market downside protection, ensuring that retirees receive a minimum payout rate, currently set at 6.8%. For example, a retiree with $100,000 in savings would receive at least $6,800 annually from this pillar 1.
On 22 September 2024, Swiss voters overwhelmingly rejected a pension reform, opting to keep the minimum guaranteed payout rate at 6.8%.
Vincent Emery, President of Reso Your Finances, highlights the stark difference in potential income between the Swiss system and the U.S. system. For instance, his mother in Switzerland receives $2,000/month from social security and $4,200/month from her pension fund, compared to a hypothetical $2,240/month from a U.S. retirement account with a 4% withdrawal rate. Over ten years, this discrepancy could lead to an income loss of $235,200.
Reso Your Finances: A New Approach
Reso Your Finances aims to improve upon the current U.S. retirement system by integrating the best attributes of various retirement systems, particularly those found in Switzerland. The company seeks to help retirees double their retirement income and offers a death benefit for beneficiaries through a rollover or transfer 1.
Emery emphasizes the importance of partnering with reliable insurance carriers that have a long-standing culture of investment management, ensuring that clients can achieve greater financial security in retirement.
In summary, the current U.S. retirement system faces significant challenges due to its reliance on individual investment accounts subject to market volatility. In contrast, the Swiss pension system provides a more stable income structure, which Reso Your Finances aims to replicate and enhance for American retirees.
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You can find this article published on LinkedIn.