Monday, September 24, 2007

The Future of Retirement

The retirement system in the U.S. is broken. This weekend I was reading my copy of Business Week, when I came across an ad on the back cover of the magazine. The full page ad by Allstate was so well-written and to the point that I decided to do an entire post about it. Here are some quotes from the ad and my take on them:

"1. Examine Social Security - Americans will not be able to rely solely on Social Security for a comfortable retirement. In the future, it's projected to cover an increasingly small percentage of the average retirement. There's debate as to whether it should be repaired or replaced. But What's clear is we need to reform Social Security now."

I could not agree more. Where is Congress? Why are we paying those guys to spend all that time in Washington if they cannot be bothered to fix a system that is obviously broken and that many Americans will have to rely upon in their old age? There are about 20 presidential candidates running around the country, both Democrats and Republicans. How many times have you heard them talk about plans for fixing Social Security? Far fewer times than you heard them talk about gay marriage, that's for sure. Why is it that we cannot make our politicians focus on what's important to the vast majority of their constituents?

Here is a sobering statistic. Take a look at the following quote from Wikipedia:

"According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration[30]) or 2052 (by the Congressional Budget Office[31]), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections."

If this information is true, politicians are choosing to ignore this problem knowing that the bad stuff will happen long after most of them leave office. Rule number one of politics: let the next guy deal with the bad stuff.

More from the ad:

"2. Boost Retirement Plan Enrollment. Companies should continue looking for ways to encourage employee participation in 401(k) plans. One proven way to increase retirement savings is through company matches. Another is automatic enrollment - employees are signed up for savings plans when they join the company, unless they specifically opt out."

I completely agree. Especially since Social Security is in such a sorry state, 401(k)'s are extremely important to the financial well-being of Americans. For once, Congress did the right thing in encouraging companies to automatically enroll employees into 401(k) plans, as part of the Pension Protection Act of 2006.

My company is about to move to automatic enrollment, and it is my hope that this encourages the 20% or so of employees who are not yet enrolled, to do so.

Finally, the last quote from the ad:

"3. Increase Personal Savings. Ultimately, everyone is responsible for their own retirement. It's why we support laws that reward people for saving. Tax-advantaged savings vehicles like annuities and IRAs are two examples of products that can help allay Baby Boomers' biggest fear: living to see the well run dry. When planning for retirement, it's time to realize that no one is going to take care of us unless we start taking care of ourselves."

Once again, spot on. Personally, when making our financial plans for retirement I am assuming that the only resources we will have are the ones we save ourselves. We are not counting on a dime from social security, not a nickel from any inheritances, and we are certainly not taking into account any manna from heaven. It's all about our personal savings. That may be too conservative, but my philosophy is that it is better to have too much money saved up than too little. After all, you can always take an extra trip to the South Pacific if you have too much money, but if you have too little you may be planning on dinner for two at Chez Dumpster.

While we should fight to make sure that Congress addresses the Social Security situation, and push companies to become more generous and more diligent in their 401(k) offerings, the ultimate responsibility for your retirement rests with one and only person: you.

So there you go. I never thought I would write a favorable article about a financial ad, but I guess there is a first time for everything.

By the way, to read about how I think the retirement situation can be at least partially fixed, check out this post.

4 comments:

Jim Bigham said...

Shadox,

I'm always skeptical when insurance companies spend money to promote retirement savings. Make no mistake, these folks are working to paint the picture of a dismal retirement in order to scare people into buying their annuity products.

The Allstate ad talks about annuities and IRAs as if they're the same thing, when we know they're not. Indeed, how many IRAs (403Bs) are funded with annuities? Just ask a school teacher or university professor.

I follow the logic of item #1 and #3. Social Security while fixable will fail at some future date unless addressed, and families should be encouraged to save more.

But I fail to understand the fascination with auto-enrollment. Why does an individual's savings level matter to you? I don't see how this effects you. Now if as an Executive your level of tax-deductible savings is reduced by another employees reluctance to save then I get it. But otherwise how is this helpful?

Respectfully,

Jim

Shadox said...

Jim, thanks for the comment.

Clearly Allstate is advertising for their own purposes. They are not a non-profit, and you are right there is no connection between annuities and IRAs. That does not mean that the rest of the points made in ad are any less valid.

Auto enrollment is key. As a member of my company's 401k plan I can tell you that I have spoken with several employees that have simply been too lazy to enroll in the plan. It's not that they don't want to sign up it's simply that they never get around to it. What does it matter to me? I think that society as a whole benefits when people are well prepared for retirement. Even if there is no direct impact on me, I think that companies have a moral obligation to ensure that workers have a comfortable retirement.

The fact that I expect to be well prepared for retirement doesn't mean that I want to simply ignore every other human being on the planet...

Jim Bigham said...

Shadox,

I respect your view and understand your perspective. One of the most compelling ironies you've discussed before is the unequal treatment of tax-advantaged savings. If my employer doesn't offer a qualified plan, then my tax-deductible contributions to my own IRA are capped at a much lower level. That's silly of course.

My disappointment is that employers rather than participants are the ones making the crucial decisions regarding retirement savings vehicles. By your own account (which has been a pleasure to follow) even motivated participants like yourself have limited influence on the choices made for them.

The ability of individuals to effectively grow their retirement nest egg is no doubt impacted by the absence of graduate level financial education. This training, coupled with an investors (not savers) temperament, is crucial.

But virtually everyone in the industry with a stake in the current system points the blame at participants, who almost never get to pick their investments from the market, but are a given a short list of expensive, opaque, products from which to choose.

Auto-enrollment coupled with the ability to use a low cost brokerage window, which would allow participants to invest in no-load, index funds (or frankly whatever they wish), would be a fine improvement over the current system. Will your new plan offer this feature?

Best regards,

Jim

Shadox said...

Jim,

I whole heartedly agree with your second comment. The 401K system is broken. There IS no reason to discriminate between tax payers just because one company offers a 401K and another doesn't.

I agree that the system is too opeque, convoluted and filled with companies that are out to make a buck at the expense of people saving for retirement.

However, better to save for retirement in a not-so-great 401K account than not have anything set aside for your old age.

Our newly re-vamped 401K will have several index funds, including an S&P 500 fund, and small cap index fund and an international index fund. The costs on these ranges between 0.6% and 0.8%, not as cheap as Vanguad, but that's pretty much the most cost-effective option we were able to find.

We will also be offering a ROTH 401K and a self directed 401K - however, trading costs in a 401K are rarely low, and our plan will be no different.