Future Retirees at Greater Fiscal Risk

Parent Cafe
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<p>[Future</a> retirees at greater fiscal risk.](<a href=“http://www.washingtonpost.com/business/economy/fiscal-trouble-ahead-for-most-future-retirees/2013/02/16/ae8c7350-5905-11e2-88d0-c4cf65c3ad15_story.html]Future”>http://www.washingtonpost.com/business/economy/fiscal-trouble-ahead-for-most-future-retirees/2013/02/16/ae8c7350-5905-11e2-88d0-c4cf65c3ad15_story.html) Majority may be worse off than parents. Savings shortfall threatens decades of progress.</p>

<p>Interesting article. Although it was not specifically discussed, I wonder how many parents are using money in their retirements accounts to pay for their kids’ expensive college educations? How many parents have stopped or reduced contributions to their retirement accounts?</p>

<p>My H is in a traditional pension system where 9% of his income is automatically withheld from his paycheck. For people who have a 401K-type defined contribution system, it’s entirely optional whether you choose to contribute or not. According to this article, it appears that many are not saving enough. Experts recommend setting aside 10-15% of your income for retirement beginning in your 20’s. Overall, people ages 55-64 have a median retirement account balance of $120,000 which is enough to fund an annuity paying about $575 per month.</p>

<p>We have spoken to our D about the importance of setting aside money for retirement at a young age. For the past two years, she’s decided to contribute the maximum amount allowed to a Roth IRA from money she earns while in college. So she’s already well on her way with $10,000 in a retirement account.</p>

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<p>Your link has an apostrophe in it so …</p>

<p>This is going to be a very big issue in society going forward…</p>

<p>[Fiscal</a> trouble ahead for most future retirees - The Washington Post](<a href=“http://www.washingtonpost.com/business/economy/fiscal-trouble-ahead-for-most-future-retirees/2013/02/16/ae8c7350-5905-11e2-88d0-c4cf65c3ad15_story.html]Fiscal”>http://www.washingtonpost.com/business/economy/fiscal-trouble-ahead-for-most-future-retirees/2013/02/16/ae8c7350-5905-11e2-88d0-c4cf65c3ad15_story.html)</p>

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<p>Thanks, dstark, I fixed the link. First time I did this so it’s a learning process.</p>

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<p>No problem…</p>

<p>It’s a huge story…</p>

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<p>H and I are pretty much convinced that we will be bailing out our 50-something peers who are too busy living in the moment to adequately save for their retirement. It’s a bit frustrating to live within our means and know that we will most likely end up paying out even more down the road to bail out those who have made poor choices in their lives. Such is life, I guess.</p>

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<p>Is that a surprise? It has been well known for years that:</p>

<ul>
<li>Defined benefit pensions are often underfunded.</li>
<li>Most people are not saving enough for retirement.</li>
<li>Social Security cannot continue current levels of benefits with inflation adjustments without high payroll tax increases.</li>
<li>Medicare costs are rising rapidly.</li>
<li>The large baby boom generation will strain Social Security and Medicare that is supported by smaller succeeding generations, while living longer but sicker than previous generations.</li>
</ul>

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<p>I usually like to find the sources and sponsors of retirement research because I’ve read so many stories of doom and gloom on retirees that were ultimately sponsored by the firms having the most to gain from more savings and investments. One other odd thing that I found was the curious way in which the term “savings” is used. In mutual fund parlance, savings doesn’t include 401K accounts.</p>

<p>So I went through the article which referenced a Senate report which referenced the ebri website (the link that the cited went to a non-existent page, but I found the article after a little digging). The sponsors of the report are AARP, American Express, Bank of America/Merrill Lynch, Capital Research and Management Company, Charles Schwab Retirement Plan Services, Deere & Company, Fidelity Investments, FINRA Investor Education Foundation, Guardian Life Insurance Company, The Hartford, Mass Mutual Financial Group, Mercer, Merck, MFS Investment Management, New York life Retirement Plan Services, Pacific Life Insurance, PIMCO, Principal Financial Group, Russell Investment Group, Segal Company, TIAA-CREF Institute, T. Rowe Price, Vanguard Group, Wells Fargo, MetLife and Prudential Retirement.</p>

<p>I have no doubt that there are many people out there that aren’t prepared for their retirement but many of those people have made choices to enjoy life when they are younger instead of saving for the future. It’s the same thing with paying for college. Some families save up and some spend their income so that they don’t have as much in savings.</p>

<p>I listened to Rick Edelman’s show this morning and he was saying how those that stayed in the market over the last five years have made out well. That you have to stick with it - that it goes up and down. That those people that sold out at the bottom are now looking to get back in based on the moneyflows that he’s seeing. Who do we blame for that?</p>

<p>One of the principles for reform in the Senate paper is that “The retirement system should be universal and automatic.” Massachusetts has this. If you do not put money into a retirement account, the state does it for you. It takes some of your paycheck and puts it into a money market account. I had a look at a letter that my son received on his mandatory retirement savings (he didn’t select any retirement program) and they took out about one percent of his salary and put it in a money market account. Of course the money market account pays some small fraction of 1% and so the account fees are greater than the income so he’s losing money in this program. I have to sit down with him and get him to pick a retirement plan, hopefully with something that generates a positive return. He’s told me that he doesn’t like the idea that he’s forced to gamble to keep up with inflation.</p>

<p>Of course a big part of the problem is that the Federal Reserve is suppressing interest rates and it looks like they will continue to do this for quite some time. This affects pension plans, life insurance companies and anyone else that needs yield but it essentially pushed everyone out on the risk curve.</p>

<p>BTW, the fourth point in the Senate paper is “Retirement assets should be pooled and professionally managed.” “The retirement system should not force people to become investment experts. Most people simply do not have the background, interest, or time to manage their retirement funds effectively. Instead, it should give everyone access to prudent, professional asset management and allow people to pool their assets with others to reduce costs and risk, including the risk of living longer than expected.”</p>

<p>How about Goldman Sachs and Citigroup for professional management?</p>

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<p>"BTW, the fourth point in the Senate paper is “Retirement assets should be pooled and professionally managed.” “The retirement system should not force people to become investment experts. Most people simply do not have the background, interest, or time to manage their retirement funds effectively. Instead, it should give everyone access to prudent, professional asset management and allow people to pool their assets with others to reduce costs and risk, including the risk of living longer than expected.”</p>

<p>So in plain English, does that imply that we are too stupid to manage our own retirement assets, so the “professional management” should take over everyone’s retirement savings, pool them with others, and pay us back what they deem we need? Allowing those who have little and live a long time to be supported by others savings?</p>

<p>I thought that was what social security was for. Wonder who wrote that senate paper.</p>

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<p>“Most people simply do not have the background, interest, or time to manage their retirement funds effectively.”</p>

<p>This is absolutely true. I know few who have the background and fewer still who even care. Most people I know plan on working until they die even those who are relatively well off have the same view. The people that I know who have retired recently have public funded pensions such as teachers and city workers - very few who have just 401k plans and ss.</p>

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<p>Friends of ours recently told us that they borrowed huge amounts of money to send both of their kids to very expensive colleges. They said they will be working well into their 70’s until they will be able to retire. I know we want the best for our kids, but this seems extreme. IMHO, we shouldn’t be jeopardizing our own financial futures to send our kids to a college that we can’t afford.</p>

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<p>As far as I know, teacher and city worker pensions are not funded by the public. Yes, they are paid with tax dollars, but there are no additional tax dollars used to supplement the pension fund.</p>

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<p>"“Most people simply do not have the background, interest, or time to manage their retirement funds effectively.”</p>

<p>That’s why if you don’t know what you’re doing, you just dollar cost average in an assortment of decent mutual funds. Vanguard even has target retirement funds based on your projected retirement year.</p>

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<p>It seems like they are taking responsibility for ther decision as opposed to asking for a bailout.</p>

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<p>That is exactly what I thought when I read that this morning (guess we CC users think alike, huh?). I don’t know that technically most parents are raiding their retirement accounts. But they are not saving at all or as much for retirement as they should because of college expenses. I am just struggling with that decision right now… I had a downturn in my business last year (and it hasn’t turned up yet). So I am eligible to deposit in my Roth IRA for 2012, which is not usually the case. I turned 50 last year, so can put even more in. But will have tuition to cover for D2 starting in the fall… with quite a bit of savings, but still about 1/3 of a pricey college needs to be paid out of salary/short term savings. I have a pretty good record of deposting in my 401K, so don’t have to. But I always like to get money into the Roth when I can. I made a note to myself to revisit on April 1 to make a decision. Might deposit some, but not the max.</p>

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<p>“That’s why if you don’t know what you’re doing, you just dollar cost average in an assortment of decent mutual funds. Vanguard even has target retirement funds based on your projected retirement year.”</p>

<p>Most people I know are just getting by and don’t have added funds like a lot of people here do to invest in their futures - they have enough trouble with the present.</p>

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<p>“I have no doubt that there are many people out there that aren’t prepared for their retirement but many of those people have made choices to enjoy life when they are younger instead of saving for the future. It’s the same thing with paying for college. Some families save up and some spend their income so that they don’t have as much in savings.”</p>

<p>Hard to argue with this. BUT … in 1975 you could get 10% on your savings account, and a decent house in San Francisco could be had for $200K. Sure, the stock market was bad … but by 1985 even that had turned around. Today, NONE of those good things are available … even though I still see projections based on a consistent 6-8% compounded growth (which most everyone recognizes as whimsy). </p>

<p>It’s hard to get people excited about saving when jobs are hard to come by, home equity is nil, interest rates are one percent, and stock market appreciation has been zero for a decade. So yes, it’s up to the current generation to step up and educate the next one, lest we be the last generation to have the option of retirement.</p>

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<p>Hmm. Thanks for posting that bit about the Roth. I should look into that even though it means yet another financial account to keep track of.</p>

<p>In reading these stories, I always try to find what the article means when they say that people don’t have enough savings because they may be ignoring 401Ks, IRAs, bonds, securities, property, etc.</p>

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<p>First, just a yay to BC for really looking behind that article.
Most people don’t have large amounts of financial savvy. Nor the security to take big risks. In late 2008, we lost roughly 25% of what was in our private retirement, as well as in the employer sponsored plan for DH. My opinion, the build back of the market was the wealthy who could take advantage of the low prices (and knew enough to guage which industries/entities would regain momentum.) For them, the game didn’t have as significant a time-out as it did, eg, for us. </p>

<p>We’re fortunate that DH’s employer kicks in a salary-based match. In my case, owing to the partiular industry I was in, values are more volatile- I’m only just now back up to where I was 10+ years ago. We’re also lucky our home value has appreciated, but think of all the people on their heads for buying at the wrong time, wrong price, wrong neighborhood.</p>

<p>Some of the blame, I sometimes joke, is the “WalMart mentality.” As more peole can afford whatever, they go for that. They are “catching up” in terms of today, not tomorrow.</p>

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<p>Well, they are related.</p>

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<p>And that’s related too.</p>

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<p>The S&P 500 is up about 130% in the last four years. The QLDs are up 500%. TNA is up 750%. Did you get any of that?</p>

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<p>The Federal Reserve is pumping $85 billion a month that we know about. Enjoy the party while it lasts.</p>

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<p>I think that we’re talking about people that have jobs. The jobs situation does seem to be getting better though very slowly.</p>

<p>Homes are for living in.</p>

<p>Interest rates stink.</p>

<p>The $spx is up 75% over the last decade.</p>

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<p>I think that educating a generation about retirement is pretty hard to do. I didn’t really care about it until my 30s.</p>

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<p>The Roth deposits are post tax, but then no tax is paid on the earnings when they are withdrawn. It is also more flexible regarding taking the original contribution amount back out if you ever need it. I never have done so, but like knowing I have that option if necessary. I do have a lot of retirement accounts (multiple employers in the past, small business, IRA, Roth IRA, etc.). I have rolled together most of what I can, and moved some others so they are almost all with the same investment company. My dad advised me to do this to make it simpler when withdrawal time comes, and I think he is right.</p>

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<p>The general numbers on home ownership are that 1/3rd own free and clear, 1/3rd rent, and 1/3rd have a mortgage. There are more people that don’t have an underwater mortgage than do and I think that’s why there has been general opposition to a mortgage bailout. There have been many small things tried with the idea that the financial industry should pay for the costs but these don’t seem to resolve the majority of the problems.</p>