Steps to Prepare for Retirement

U.S. Companies Can't Continue Offering Adequate Pensions, AICPA Survey Reveals

by Joel Allegretti
April 27, 2006

The vast majority of CPAs serving as corporate CEOs, CFOs, Controllers and in other executive positions believe American companies can't continue providing pensions that adequately cover their employees' retirement years, according to the results of a new survey by the American Institute of Certified Public Accountants (AICPA).

Moreover, many CPA executives believe reductions in pension benefits pose a threat to a company's ability to attract and retain the talent they need to compete.

"These findings are a wake-up call," said John Morrow, Vice President of the AICPA's division for CPAs in business and industry. "The traditional system of rewarding employees with pensions after long years of service is on its way out, because companies simply cannot bear the cost. Therefore, employees will have to find alternate methods of funding their retirement."

The AICPA surveyed more than 3,100 of its members in business and industry during the month of April. Of them, 59.5 percent work for private companies, and 21.4 percent are employed in public corporations. The remaining respondents are in the not-for-profit and government arenas.

When asked if U.S. companies could continue providing employees with pensions that adequately cover their retirement years, nearly three in four (74 percent) of the respondents said no. More than half (54 percent) indicated that the erosion of these benefits would hurt recruiting and retention efforts. A slightly higher number (57 percent) believe rising healthcare costs are the biggest barrier to a company's ability to offer pension benefits; nearly a third (30 percent) said the pressures to compete in the marketplace outweighed the pressures to provide retirement benefits.

Virtually all the respondents said their companies offer some type of retirement benefit today, with the majority offering a 401(k) plan with matching contributions (65.6 percent). Less than 5 percent said their companies offer no retirement plan at all.

Interestingly, well over half the respondents (59 percent) believe Americans have to educate themselves about retirement savings strategies.

"American workers have to understand the pension safety net will probably not be there for them and that planning for retirement is their personal responsibility" said Carl George, Chair of the AICPA's National CPA Financial Literacy Commission. "Americans must recognize that unless they take a more active role in their own retirement planning, they may find themselves working far longer than they had intended."

Steps to Prepare for Retirement

The AICPA's "360 Degrees of Financial Literacy" program has set up a consumer Web site, www.360FinancialLiteracy.org, with hundreds of "free" tools and resources to help educate consumers about personal finance matters, including retirement. The basic retirement planning steps recommended on the site include the following:

1.) Know Your Retirement Needs

Experts estimate that you'll need about 70 percent of your pre-retirement income -- lower earners, 90 percent or more -- to maintain your standard of living when you stop working.

2.) Find Out About Your Social Security Benefits

Social Security pays the average retiree about 40 percent of pre-retirement earnings. Call the Social Security Administration at 1-800-772-1213 for a free Social Security Statement and find out more about your benefits at www.socialsecurity.gov.

3.) Learn About Your Employer's Pension or Profit-Sharing Plan

If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one. Before you change jobs, find out what will happen to your pension. Learn what benefits you may have from previous employment. Find out if you will be entitled to benefits from your spouse's plan.

4.) Contribute to a Tax-Deferred Savings Plan

If your employer offers a tax-deferred savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate.

5.) Put Your Money in an Individual Retirement Account

You can put up to $3,000 a year into an Individual Retirement Account (IRA) and gain tax advantages. When you open an IRA, you have two options -- a traditional IRA or the newer Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Also, you should know that the after-tax value of your withdrawal will depend on inflation and the type of IRA you choose.

6.) Don't Touch Your Savings

Don't dip into your retirement savings unless it's an absolute necessity. You'll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or your new employer's retirement plan.

7.) Start Now, Set Goals and Stick to Them

Start early. The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement savings a high priority. Devise a plan, stick to it, and set goals for yourself.

8.) Consider Basic Investment Principles

How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you'll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.

9.) Ask Questions. Check Out Free Resources

Talk to your employer, your bank, your union, or your CPA. Ask questions and make sure the answers make sense to you.

The American Institute of Certified Public Accountants (www.aicpa.org) is the national, professional association of CPAs, with approximately 330,000 members, including CPAs in business and industry, public practice, government, and education. It sets ethical standards for the profession and U.S. auditing standards for audits of private companies; federal, state and local governments; and non-profit organizations. It also develops and grades the Uniform CPA Examination.