Defined contribution plans are a bit different in that some combination of you and your employer on your behalf will contribute a percentage of your annual salary and invest it, allowing that money to grow over time. When you retire, you'll recoup your contributions and gains, barring any losses. These plans are common, and you've probably heard of them. They're the 401(k) plans, 403(b) plans, employee stock ownership plans (ESOP), and profit-sharing plans. Each have their own rules and contribution limits. 

What if your employer doesn't offer a corporate retirement plan, or you don't work for a large employer? You may be eligible for a Traditional or Roth IRA, SEP-IRA, Simple-IRA or Solo 401(k), each with their own rules and contribution limits. Confused yet?

Over time, the government and the agencies governing taxes and investing have established new types of accounts to accommodate various workers: salaried employees, owners, self-employed persons, and gig workers. As more accounts have been created, the more complex and confusing retirement planning has become. An overhaul to retirement savings accounts is long overdue. Contribution limits, eligibility and catch-up contributions should all be revised.

According to USA Today, at age 65, Americans are expected to live an average of another 19.4 years, and the typical retirement-age American spends $50,220 a year. Multiply those figures and add in a little extra for unforeseen expenses and additional financial security, and a comfortable retirement costs an estimated $1,120,408 in the United States.

According to data compiled by the Federal Reserve in 2020 (see chart 1 below), the median account balances in retirement accounts are not looking great. That is due in part to American's doing a poor job saving, but likely compounded by offering Americans such poorly designed and confusing retirement planning options.

(Chart 1, Federal Reserve data, via The Motley Fool)

So how can we fix the problem of over-complexity and simplify retirement savings? Keep it simple. Whether you are participating in a group retirement plan or an individual retirement plan, the new max contribution limit should 25% of gross earnings. Over 50 years old? You can contribute 35% of gross, capped at $100,000 and increasing each year based on inflation. If you are self-employed or own a single member corporation, you get to choose the employee and employer contribution breakdown at year end.

If you are contributing to an IRA, there are ONLY two options – a Traditional IRA or a Roth IRA.

Why should someone only eligible for a Traditional or Roth-IRA be limited to $6,000/year if their employer doesn't offer a group retirement account? Why should a sole proprietor have to wait for their accountant to compute their eligible SEP-IRA contribution at year end? And how come the contribution limits are so low currently especially given our current inflationary environment, along with increasing costs of medical care in retirement?

What exactly would this look like in year 1 following the proposed overhaul to retirement plan options? Chart 2 below outlines the breakdown, along with the $100,000 cap.

(Chart 2, courtesy Julian Schubach)

A few things are clear when evaluating the current state of retirement in the United States: American's have done a poor job of saving, the data suggests American's believe they need more than $1 million to last them during retirement, and the complex options available for retirement savings have made the ability to save very confusing for the average saver. There is no easy solution that would satisfy the government, the IRS, employees, and employers, but something must be done before the problem gets worse.

Julian Schubach is Vice President, Wealth Management at ODI Financial. Julian serves a broad range of creative clients including artists, entertainers, and digital influencers, providing comprehensive financial education, planning and wealth management. Julian's clients include multi-platinum selling musicians and producers, award winning actors, directors and choreographers and best-selling writers. In addition to his private client work, Julian provides financial education and literacy seminars to arts grant recipients and clients of arts non-profit organizations. Julian has been named a 'Top-100 Financial Advisor' by Investopedia and in 2018, Julian was a contributing writer for New York Foundation for the Arts book, 'The Profitable Artist,' penning three chapters focusing on personal finance for creatives.