This is the first of what may become a regular column on issues we all deal with regarding retirement plans. So why rants? Among all the products, people, regulations and results, we all have a few issues to rant about!
The goal of this column is not simply for me to shout, but rather to get you thinking about how we can make retirement more secure for working Americans. Let’s become a chorus of rants, and see if we just might be able to improve all participants’ preparedness in the process. Let the ranting begin!
1) Can we just retire retirement?
EBRI’s 2011 Retirement Confidence Survey reinforced what has been a growing trend, people expecting to work during retirement. The current survey result was 74%.
With the global pension crises, 1st Pillar (Social Security) challenges, retiree healthcare concerns, lower fertility rates, increases in life expectancy and the corresponding negative economic growth outlooks, retirement is arguably too costly for societies, businesses and individuals. What if our mentality shifted back to the era when the concept of retirement was born?
“Retirement” was born in the late 19th century during an era when we worked until…, and lived with multiple generations of our own family. When Social Security came into the picture (1930s), retirement was “set” at life expectancy plus five years (that’s roughly 83 today, from birth).
Maybe retirement – as it has been perceived – needs to be retired. Duly noted is that decent health and employment availability are necessary requirements. For those unable to either continue or obtain work, retirement would unfortunately be of the non-elective sort. That is why we all need to save. We need to save because our futures are uncertain. However, this does beg the question about just how much we do need to save to insure those uncertain futures.
2) Thank you, no, I don’t need anymore.
For retirees, it’s all about monthly income. What is needed depends upon spending—just not all spending. Not all spending is equal. Spending is comprised of both fixed or roughly fixed (mortgage, food) and variable (e.g., entertainment and vacations) monthly expenditures. While the variable examples are typically strongly desired, it’s the fixed monthly bills that generally cause anxiety. Consider the following steps:
- Minimize (as best one can) fixed expenditures going into retirement by reducing any or all debt
- Don’t use ballpark, estimated replacement ratios, but rather calculate fixed monthly needs versus variable monthly desires
- Review how your monthly retiree paychecks–Social Security and/or Pension (if you’re so lucky) checks–compare with your fixed expense needs. If there’s a difference, then that may be the monthly income to possibly “buy-up”.
There are many ways to buy additional monthly income, but not everyone needs it. Don’t buy what you don’t need, and be wary of investment products that “also” offer monthly income benefits. The products may seem to be very impressive but may not be worth the additional costs, especially given your situation.
3) Too many people or just too many retirees?
In one corner, we have the young upstart and extremely popular “Retirement,” and in the other the millennium-aged and oh so powerful “Nature.” Retirement relates to economic growth in a very straightforward manner via an alternative measure of GDP. GDP = Growth in the number of workers times the Growth in the output per worker (productivity). Retirement, by definition, reduces the number of available workers. Without a corresponding increase in productivity, growth has to decrease. Put another way, based on historical productivity rates, Retirement will likely need population growth if it is to remain viable.
Viability can be bolstered by immigration or increasing fertility rates. However, fertility rates are too low or dropping around the world, and immigration requires population growth to come from elsewhere. Immigration is a zero sum “game” across countries. Within any desire to emigrate and work, a society’s openness and willingness to accept immigrants is a factor. How many countries have open arms today? In an outstanding essay on our resource challenges ahead, Jeremy Grantham (GMO) in his first quarter 2011 newsletter laid out some very clear risks regarding population growth and the fewer resources from which to support them. People’s creativity has historically suspended any Malthusian affects such as running out of food.
Which do you think will be the winner in this contest: Retirement (favoring population growth) or Nature (against population growth)?
4) Enough about not buying annuities already!
On 6/5/2011, Richard Thaler–noted behavioral economist–wrote an article related to the “Annuity Puzzle” in the Sunday NY Times business section. The article framed the lack of participant annuitizations as a puzzle in need of a solution.
I admit great disappointment with the article. Although it was written by an expert in behavioral perspectives, it didn’t address “whose money is it.” This perspective could loosely be summarized by how individuals think about pension dollars (the company’s) versus defined contribution dollars (theirs). People have been known to gamble with the “house’s money” much more than their own. While this isn’t a puzzle in terms of behavior, it doesn’t offer any help to those in need. I am very concerned regarding plan sponsors and/or regulators “solving” this puzzle for individuals.
Enough already! If retirement planning is to be about replacing monthly income, then why doesn’t the industry just have each individual’s payroll contribution buy “pieces” of deferred monthly income? Consider that $100 “units” of monthly income for life beginning at age 65 (or 67, 70…) may cost $150 today. Perhaps a life insurance benefit can also be included to address the concern about dying too early and losing all ones assets. Think of how much easier this would make it for all individuals to plan. If you need $2,000 per month today, then you need to acquire 20 units which cost $3,000 today.
Why isn’t this being proposed? This isn’t being proposed primarily for the following reasons: the investment houses have the money and this is more of an insurance product, the insurance products (available today) have some record keeping challenges with today’s current record keeping set-ups, and this monthly income “immunization” approach would quite likely (at least in our present low interest rate environment) require more contributions from individuals (ouch!). Even if those hurdles could be leapt, there would still remain serious additional challenges (not even including advisor/brokers knowedge and expertise issues). One issue in particular is counterparty risk. This is the risk that any insurer might not be around and/or capable of making good on their guarantee (biggest ouch!).
The behavioral hurdles in the NY Times article are simply speed bumps. If the policy wonks think we should all own annuities, then propose rebuilding the system with a focus on the end—at the beginning.
5) Pensions may simply be just too good to be true.
And, we know what happens when things are too good to be true; consider:
- While plan liabilities seem to be ever-expanding, plan asset growth is beholden to the whims of markets, can be quite volatile, and as a result will often not match the liabilities (assuming no successful embrace of liability-driven investing).
- There is the “creative destruction” of old-line, big businesses (those with pensions) that are ever-shrinking. Shrinking businesses and their corresponding revenues cannot easily support the comparably ever-growing number of pensioners.
- With governmental plans, there is no creative destruction (i.e., competitiveness) issue. However, economic growth is still needed to offset the increasing costs. Growth is inextricably linked to workers, who upon retirement negatively impact growth potential.
Without a fresh “crop” of workers coming into “local” economies, creative destruction can come into play again even with governmental plans. Overall, benefits are too rich, given today’s risks and funding sources. The benefits will have to be rationalized based on worker productive capacity (i.e., working longer) and benefit availability (only upon reaching a productive capacity threshold, if healthy).
In the US, future pensioners (primarily public workers today) just might be the more retirement “have’s” while private workers might be more the “have not’s”. Since taxes support these pensioners, this is creating a very serious potential and unfortunate resentment. This presents opposition from those who are a source of the needed funding and puts these wonderful benefits (as they were promised) at significant risk.
6) Lies, damn lies and statistics! (thank you, Mr. Twain)
In February 2011, the WSJ ran a story regarding Boomers and their 401(k)s. The article focused on how, on average, participant-directed plans have not helped them be prepared properly for retirement. It would have been nice if a journal that so often focuses on statistics would not publish something so poorly considered:
- How is a lack of savings the fault of a small section of the tax code—it can’t be.
- Boomers are far from uniform. They range in age from 47 to 65. And, any average would include non-savers, newer savers (those who maybe started in the last decade), unfortunate savers (markets have been, well…), and many who have/had pensions (don’t/didn’t “need” to save).
- Back to the non-savers! Aren’t boomers notoriously materialistic? Don’t many wait to ramp-up their retirement savings in their 40s and 50s…maybe some haven’t started yet? And, new research from the field of neuroscience is helping us to understand how we are even wired against saving.
The more recent “automatic” features from the Pension Protection Act of 2006 will undoubtedly help the Boomers and everyone else (as I prescribed automatic enrollment, automatic deferral increases, and automatic rebalancing in a 2002 published article).
Can’t improving financial literacy help too? Maybe not according to Lauren Willis, Professor of Law, Loyola Law School Los Angeles. Dr. Willis gave a fascinating presentation at the Conference on Financial Education & Consumer Financial Protection in Boston in May (2011). Her topic was “Financial Education: Lessons Not Learned & Lessons Learned” and highlighted:
- No better financial behavior was demonstrated by young adults who received financial education in school. (Mandell & Klein 2009)
- No better financial outcomes were achieved for adults who received financial education in school. (Cole & Shastry 2008)
Have defined contribution plans failed the Boomers? Absolutely not. The story was more about a lack of knowledge about statistics. That written, the Boomers (and everyone else) can stand to do more retirement planning. Let’s just keep our expectations in check since this isn’t easy, isn’t easy to learn and against our evolutionary wiring.
Now it’s your turn. What rants might you have? Please rant along with us by emailing your rants to me at email@example.com. Our policy is that all emailed rants will be considered for publication–along with your name and company name–in a future column. Your email will be an acknowledged acceptance of this policy.
Michael S. Falk, CFA, CRC® is the founder of Michael S. Falk Asset Consulting. His practice was founded on the singular principal of providing value-added asset consulting. The asset consulting perspective acknowledges that the wisdom of crowds can denigrate into madness at times. Assets should be managed with the serenity to accept the market’s realities; the courage to pursue its opportunities; and the ongoing pursuit of wisdom to understand the difference. He is a member of the CFA Institute and its Approved Speakers List; a member of the Profit Sharing 401(k) Council of America (PSCA) and its Investment Committee as the Vice Chair; a member of the Financial Management Association (FMA) Practitioner Demand Driven Academic Research Initiative; and adjunct faculty at DePaul University.
Other past issues (earn CE for 2017, 2016, 2015 issues only)