The Retirement Dilemma

I can’t believe how quickly time flies. It has been over 2 years now since I made the move over the Atlantic to join Yahoo! HQ in Sunnyvale, California. But while one is working away and enjoying life in sunny California, there is one thing, one topic I am always putting off. Something that I should really deal with, but I am not really sure how to go about it, and that is taking steps towards financial security when the retirement age comes around. In a system where it is more or less entirely up to the individual how he wants to do it, it is especially difficult for me coming from a country where the options how to save up for retirement somehow sounded a little more…sensible.

The Pension system in Austria

In Austria, it is, more or less, dead simple. Whenever you are employed, that is working as an employee in a company (no matter if part or full time), part of your salary is contributed to a public pension scheme. When you reach a certain age, currently its 65 for men, the individual has legally gained the right to retire, meaning that he is able to drop out of the workforce and receive a certain amount of pension, paid for by his contributions made to the fund over e.g. 40 years in the workforce. The amount that he gets is typically around 70 to 80 percent of the salary he last received while still working. So considering that the cost of living in Austria is, by far, not as high as in the UK or in California, someone can expect to still make a decent living on these 70 or 80 percent.

Of course, the fact that people live longer and that there are fewer and fewer ‘younger’ people in the workforce being able to ‘pay’ for the pensions of the ones retiring, this system is no longer sustainable in the long run and prompted some reforms already which cut down on the amount of pension a retiree can expect. Experts are already advising people to, if financially possible, compensate these cutbacks by contributing to pension schemes offered by private companies, such as national insurance companies like UNIQA. Similar to the state-run public pension schemes, one makes regular contributions and when the age of retirement comes around, gets a certain amount as a pension paid out on a monthly basis.

So far so good.

The American DIY approach

As with many other things, Americans want choices and be responsible themselves about when to retire and what to do about it – and the last institution they would like to trust with the task of taking care for their retirement is the government. Or so it seems.

I remember that after the first year in the US, I started to do a little research as to how Americans save up for retirement, well knowing that I might have to do the same thing if I am considering to stay here longer than just 2 or 3 years. Very naively I was expecting to find a similar system to what I was used to from my home country, but I could not have been more wrong, at least speaking from my current point of view and level of knowledge.

Please correct me if I am wrong but so far I have identified the following options:

  • 401(k). Many Americans seem to opt for this, as, especially in larger corporations, the employer matches the 401k contributions of the employee up to a certain percentage. However, I also heard that because the funds contributed into a 401k plan are invested on financial markets, meaning stocks and the like, the money is by far not guaranteed to grow until your retirement age comes around. I heard stories that when the economy crisis hit, some people had lost 50% or more of their 401k contributions because some of the shares their 401k money was invested in took a plunge on Wall Street. To me this does not seem like a system I would want to trust my money with when I can’t be sure I am actually getting enough out of it at the end to retire on.
  • IRA.I am little confused about IRAs in general, but from what I understand is that it is an account, e.g. as many banks offer it, that give the account holder certain tax incentives when used for retirement savings. From what I gathered, it is possible to make annual contributions to an IRA up to a certain limit and that money can then be used to either invest in funds, stocks and bonds for example, or, more conservatively, in a CD. Depending on the type of IRA, there are tax incentives related to either the contributions or the earnings of an IRA.

These are the two options I have identified, however neither of them seem to provide the financial security I would hope for when putting away money for my retirement. To me it seems that, with both systems, if investment decisions turn out to be bad when you are 60, you might be getting a lot less. A whole lot less if you are really unlucky. Doesn’t sound that secure to me.

In addition to these options, there is something else I need to remotely consider: It is true that I really like it here in California, in the US, but it is a possibility that I might have to go back to Europe, to Austria even, at some point in the future. If I already made considerable contributions to either a 401k or an IRA, what is going to happen with that money once I leave the country?

As you can tell, this topic brings up a lot of headaches for me. It would be great if any of you, my dear readers, have any tips or recommendations as to which way to go or how you, personally, are tackling the whole ‘saving for retirement’ subject. Thanks in advance!