Work Until You’re Dead?!

Many Americans are on a financial pace to have to work until they are dead. According to the Employee Benefit Research Institute, the median amount workers nearing retirement age have saved is a mere $77,000 and the median salary for that age group is $61,000. What’s even worse is that 50% of the private sector population doesn’t even have a retirement plan! How did this happen?

First, many Americans believed that Social Security would be there in the end. Social Security is already paying out more than it is bringing in. Given that the first wave of Baby Boomers is starting to retire, this situation is only going to be worse. Social Security most likely won’t make it through the 40 million plus Boomers set to retire over the next decade, nor will it be there for future generations.

Second, many Americans believed that their company would provide a pension for their retirement. The reality is that only about 11% of the private sector is actually covered by a pension. The combination of company paid pensions and Social Security was supposed to provide the Baby Boomers with sufficient income through their golden years.

Unfortunately, most Americans failed to have an effective plan B.

Instead, most Americans who recognize that Social Security would not be there and didn’t have a pension have tried to build for their retirement through a 401(k). However, the 401(k) was never meant to be a standalone retirement plan, rather it is supposed to be a nice ancillary package to a pension plan 401(k) plans have been criticized as risky because the funds are generally invested in the unpredictable stock market. Equally critical is the typical penny-pinching employer “matching contribution” equaling 3% of pay, the second lowest in the world. This combination makes it an ineffective way to save for your retirement.

When I was in the Life Insurance Industry, the rule of thumb for nest egg adequacy is that you need the equivalent of 10 times your salary near retirement. Unfortunately, most people will be lucky if they have a little more than 1 time their salary, pus I never trust “rule of thumb”. I mean how did they come up with 10 times?

To combat this problem, the government is looking to implement the following:

* Automatic Enrollment: An automatic enrollment plan is one in which an employer automatically enrolls its employees in a plan by salary reduction without requiring them to take any initiative or action in order to participate. Employees with a 401(k) plan contribute 3% of their pay, one third of what is needed, without requiring a minimum employer contribution. Again, the flaw with this plan is that you would be required to enroll in a plan that will not provide for you the revenue needed for retirement.

* Automatic Annuitization. The belief in this plan is that employees could invest in their 401(k) account balances and at retirement, annuitize their principals, and get paid a lifetime monthly payments. The only real benefit from this plan would be ensuring lifetime employment for annuity salesmen but would provide insufficient income for annuity owners. The worst part is that once annuitized, you lose the principal. For example, if you invested $100 for 40 years at 8% interest, your future value would be $350,000. Say you received interest payments of 8% each month for a total of $2350/mo. You would essentially exchange your principal amount for the monthly payment. If you died after 1 year, then you would have traded in $350,000 for a total of $28,200. This plan has major flaws.

* Automatic IRA. This one is for the 70 million Americans with no plan at all. With an automatic IRA, employees can contribute but employers don’t have to. The Automatic IRAs would be permitted to invest only in options determined by Treasury and Department of Labor guidelines. A mandatory investment option would include a “principal preservation fund” that would have to invest in a newly created Treasury Retirement Bond, the “R-Bond,” specially designed for use with an Automatic IRA. Basically, automatic IRAs would force you to invest in junk that offers very little return.

The sad fact is that neither your employer nor the government has a good plan to help the average American retire. It is up to you to provide for yourself. Unfortunately, most Americans don’t know how to save long-term. As a good friend of mine once said: “I never made a bad decision when I had all the information in front of me at the time”. What she meant was every bad decision she made came from not having all the information. I believe this is the case for most people as well.

So here’s the information you need to save for the future. The solution to a having a retirement plan that works is to find one that will pay you a fixed interest rate. Returns are risky and can have a loss (like mutual funds or stock markets). With a fixed interest rate, you are able to accurately determine how much money you need to save on a monthly basis in order to achieve the amount needed for retirement. And using a program with a fixed interest rate allows you to forecast what the future value of your money is going to be as well as how much you will pay yourself each month. How else can you plan for your retirement without this information? Anything else is just financial guessing.