Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

Interesting Piece on Retirement

By JLP | July 25, 2012

Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.

Ouch!

That stat came from Our Ridiculous Approach to Retirement Planning by Teresa Ghilarducci, a supposed expert in retirement planning.

Not clear what “nearing retirement” means but the number is pretty sad for anyone over 30.

Her piece is interesting. I’ll share a couple of highlights:

…it is irresponsible for Congress to deny that regardless of how much you throw 401(k) advertising, pension cuts, financial education and tax breaks at Americans, the retirement system simply defies human behavior. Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs.

Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

Her solution?

The coming retirement income security crisis is a shared problem; it is not caused by a set of isolated individual behaviors. My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

Professionally managed? Did you catch that?

UGH! I don’t like this at all. I would rather the government require people to save a certain percentage of their income and invest it how they see fit than to have some sort of one-size-fits-all approach to retirement planning. Afterall, if I read and understand how to save for retirement, why should I be penalized? Her solution is nothing more than another social program. If people don’t want to save for their own retirement, then they should be left to suffer the consequences. I know for a fact that some people did not save for retirement because they knew social security would be there for them. In other words, social security provided an incentive NOT TO SAVE.

Thoughts?

Topics: Retirement Planning | 18 Comments »


18 Responses to “Interesting Piece on Retirement”

  1. tom Says:
    July 25th, 2012 at 11:58 am

    This is just stupid.

    I’m sorry, if you didn’t have the foresight to save for retirement over and above SS, you are a moron. Enjoy living on a pathetic fixed income from SS.

    I am all for government mandated savings instead of some made up program. Guaranteed rate of return? Is she stupid? Does she not understand what pensions are going through right now?

    Here’s my plan:

    Reform Social Security. Anyone over 30, you have traditional Social Security. Anyone under 30, you are required, by law, to save 10% of your income into a private account w/ predetermined low cost investment options (index funds, ETFs, etc.). You are also taxed 2% of your income that goes into the General SS account invested in treasury bonds. Both are matched by your employer. When you reach the new retirement age of 75 (yes, we will live much longer and be healthier), if your account does not meet a minimum threshold, determined by the new SS admin, you will receive a lump sum to your account from the SS general fund. You will then be transferred into an annuity that is administered by a low cost, vetted management company and get a fixed monthly income.

    In order to pay for current seniors and those over 30, for 20 years, we will pay a regressive 4% tax, that reduces by 1% every 5 years. This will ensure we do not short change current seniors.

    Companies are still required to offer additional retirement accounts with the same current tax benefits.

  2. JLP Says:
    July 25th, 2012 at 12:07 pm

    God. Bless. You. Tom.

  3. JLP Says:
    July 25th, 2012 at 12:08 pm

    Seriously, these “experts” try to paint people as dumb but I assure you that most people know exactly what they are doing when they elect not to save for the future. They are doing what the government has trained them to do: rely on the government.

  4. Jack Says:
    July 25th, 2012 at 12:26 pm

    I have an even better plan, Tom — require retirees to take the money directly from their own children and grandchildren. Don’t have any? Then what the 7734 have you been spending your money on for the last 40 years?

  5. Retiredat40 Says:
    July 25th, 2012 at 12:53 pm

    Actually, these are a really good idea for the average person. Much better than having a 401(k) plan that rips you off with charges in excess of 2% per year which many plans do.

    As for the professional management that would be far preferrable if it provided very low cost management via a pension fund arrangement than the average Joe trying to figure out how to manage their account. The returns would be far higher than they get now in their 401(k).

    The people that don’t like it are the same zombies that watched their 401(k) values fall by 50% by being 100% in stocks and thinking themselves a genius.

  6. tom Says:
    July 25th, 2012 at 1:34 pm

    PS… with my plan above, when reforms are enacted, that sets the cutoff of whether or not you get a traditional SS plan or the new SS plan. Have to set the line somewhere. Anyone under 30 will have both, but will not accumulate any more to their traditional SS plan.

    @retiredat40,

    401(k) plans are not a rip off, because they are optional. If you don’t want to invest, then don’t invest. Starting in August, management fees will be completely clear. If you find that your 401(k) management fee is way too high, then demand change, or invest to get the matching and put your money elsewhere.

    Professional management, as this woman describes, is just a ploy. She says guaranteed rate of return… really? How can you guarantee that? You know who guaranteed a rate of return? Bernie Madoff. Even if it’s low cost management, pension funds have been suffering because they have guaranteed rates of return. Pensions are requiring massive amounts of additional funding to cover their obligations.

    I’m 100% invested in equity. I couldn’t care less if my 401(k) value falls by 50%. That just means it’s time to jack up my contributions. If you are 50+ and are 100% in equity, then you’re just stupid.

    People just need to educate themselves so they aren’t investing like morons.

  7. mercyn Says:
    July 25th, 2012 at 1:42 pm

    Too many people have no idea how to make sound investment choices. But I do not like the idea of large financial institutions handling the $ – I fear the only winners will be the companies. Pensions are a sound idea unless your company crashes and burns. Why hasn’t anyone (not the gov’t – government pension insurance is limited)) come up with the idea of insuring pensions? The certainty of a pension is good – the uncertainty of wondering whether your company will last decades is not.

  8. Retiredat40 Says:
    July 25th, 2012 at 1:46 pm

    No, you need to educate yourself and stop swallowing the financial industry’s pitch hook, line and sinker. The average 401(k) stinks and most people would be better off contributing to an index fund. Very often, the only thing a 401(k) is good for is the match.

    You will likely pay more taxes in the long term by using your 401(k) than you will not using it, especially if you are likely to build up a big balance by retirement.

    How do you think annuities stay in business? It’s not that complicated. The government can guarantee a return because it has forever for things to even out.

    Pensions are suffering because they have been underfunded for two decades and investment expectations have been assumed at more than 10% to avoiding the proper funding. No retirement plan works without funding.

    I wouldn’t get myself too wound up. This plan will never happen. The financial industry will not be surrendering their cash cows. This is strictly a hypothetical that will never come to pass.

  9. Beeg Says:
    July 25th, 2012 at 2:36 pm

    Here is my opinion…no soc security reform. End it, quit being the nanny state. The government is not our parent, we should treat it as such.

    Reforming soc security would be like reforming government schools. You are dealing with a lost cause. You can get something from nothing.

    Have the citizen invest how they wish, if they don’t store like ants, then it is up to them to deal with it. They can work longer, find family and friends to help them. Or, get help from their local church.

    Besides, retirement is the adult version of Santa Clause…why would someone who has 20 – 30 years of good living left go sit and watch TV for the rest of their life.

    My 2 cents…never retire. Maybe change careers or work plans later in life to something more legacy driven, but don’t give up serving customers to just sit around and wait to die.

  10. tom Says:
    July 25th, 2012 at 2:40 pm

    @retiredat40,

    Exactly… pensions are suffering because of guaranteed returns and are now way underfunded.

    What would the government guarantee, 1%, 2%, 5%? 10 year treasury is yielding 1.5%. That won’t even cover inflation.

    I completely agree that the average 401(k) sucks except for the match, that’s why I said to get out if you have to.

    My point is this lady’s plan is much worse than the status quo.

  11. Retiredat40 Says:
    July 25th, 2012 at 2:48 pm

    Tom,

    No, it’s not. It’s much better just by lowering fees alone. The assets will be invested pretty much the same way. It is impossible for the 401(k) to produce a higher return on average. We are talking about six figures in higher balances at the end.

    If a person contributed 7% of their income, they would have a massive balance at the end. If the funding is guaranteed, the payment can be guaranteed. That’s why actuaries get paid a salary. And they are very good at what they do.

    No, pensions aren’t suffering because of the guaranteed returns. They are suffering because they weren’t funded properly. Some of them were too generous as well. But the major problem for most plans is lack of funding.

  12. Retiredat40 Says:
    July 25th, 2012 at 2:48 pm

    Tom,

    No, it’s not. It’s much better just by lowering fees alone. The assets will be invested pretty much the same way. It is impossible for the 401(k) to produce a higher return on average. We are talking about six figures in higher balances at the end.

    If a person contributed 7% of their income, they would have a massive balance at the end. If the funding is guaranteed, the payment can be guaranteed. That’s why actuaries get paid a salary. And they are very good at what they do.

    No, pensions aren’t suffering because of the guaranteed returns. They are suffering because they weren’t funded properly. Some of them were too generous as well. But the major problem for most plans is lack of funding.

  13. Jon Says:
    July 25th, 2012 at 3:49 pm

    Didn’t we talk about this before? The socialization of 401k’s? What did other governments do when they did this? They used the money for other things, just like they did with SS. Why do we keep trusting the government with our money?

    For that matter why do I even need to invest, oh wait, that is right, if I don’t earn interest on my money then the government/banksters will take it through inflation.

  14. BG Says:
    July 25th, 2012 at 4:20 pm

    Retirement is a recent phenomena, largely created by financial institution’s marketing departments.

    Most people have worked until they die, and most people in the future will also work until they die.

  15. Jack Says:
    July 25th, 2012 at 6:51 pm

    I think it is more created by our increased longevity. Until recently, saving 10% of one’s income, one could not save enough to retire on. Now, someone making minimum wage his whole life (18-65), saving 10% and investing in the S&P500, would retire with over $500,000 — for a retirement income of $20,000/yr., which is more than minimum wage! (Obviously, few people work their entire lives at minimum wage, so they will be able to save more.)

  16. Mark Says:
    July 26th, 2012 at 9:51 am

    @Retiredat40: You said that “You will likely pay more taxes in the long term by using your 401(k) than you will not using it, especially if you are likely to build up a big balance by retirement.”

    I think you are making the same miscalculation that people make when they choose a Roth over a Traditional IRA. Keep in mind that those with high 401-k balances will most likely be those who made large contributions – which are usually those who had high incomes, and hence are in high current tax brackets.

    The money you invest now (401-k or Trad IRA) is sheltered from taxes at your MARGINAL rate. However, when you take it out, it will be taxed at your AVERAGE rate. In our income tax system, the first dollars you earn are not subject to any tax at all, and the rates increase on successive brackets of income. I personally pay a 35% MARGINAL rate, but a 22% AVERAGE rate. Even if the tax rates rise, they would have to rise a lot to overcome this effect. Or I would have to get into a very high income bracket so that my 401-k withrawals are over and above other income, and hence taxed at a high rate.

    I do agree by the way, that the capital gains and dividends could have been taxed at those rates (whatever they happen to be in future, but 15% today) and that is clearly lower than 22%. But the math is not as obvious as many believe. What combinations of paying 22% later to avoid 35% now overcome the disadvantage of paying more than 15% later instead of 15% now?

  17. Valkyrie Frost Says:
    July 26th, 2012 at 3:13 pm

    Here’s an idea. Tear it apart and see it it ticks.

    This plan involves converting from SS to Treasury Inflation-Protected Securities (TIPS). Basically, as long as the govt is in debt, we could use the debt as the tool to provide Social Security. The difference being, Social Security is a pawn of politics. TIPS are individual contracts directly with the Treasury and therefore not subject to Congress-critter election manipulations.

    So, take the 12.4% FICA and have it invested in TIPS that mature starting at age 65 (a rolling date to age 85 (10 years past life expectancy).

    If you make it past 85, the govt pays a meager Old Age check to cover your basic needs.

    The key here is the TIPS bonds pay both interest and inflation. They are yours and can be left to your children or grandchildren (tax free) when you die. They are not for healthcare or education. They are not equities and subject to crashes of the stock market.

    It’s not insurance. It’s not a regressive tax. It’s not a progressive tax. You simply get out what you put in.

    For additional retirement income, 401K, pension plans, IRAs, and numerous other *tools* are available to assist a person looking to retire with more than just a TIPS payout.

  18. Valkyrie Frost Says:
    July 26th, 2012 at 3:19 pm

    Oh, and if the govt defaults on the debt, we’re all screwed anyway.

    Also, I distrust “private” managers having access and responsibility for so much money. Congress is bad enough.

Comments