American retirement’s upcoming ‘train wreck’

September 19, 2018

Last week I wrote about an interview featuring John Bogle, who founded The Vanguard Group and created the first index mutual fund. He discussed the investing industry’s practices and how fees can erode a nest egg significantly.

Today, I want to focus on another part of that interview — how the financial burden of retirement has shifted from organizations (corporations and governments) to individuals.

The effects have been profound and are ushering in what Bogle called “a coming train wreck” for American retirees.

As recently as a few decades ago, the retirement income foundation for most people consisted of a pension, Social Security, and personal savings — in that order.

However, that model has effectively been reversed.

Most companies have switched from defined benefit plans like pensions to defined contribution plans like 401(k)s.

With a pension, the company is responsible for a defined benefit, like paying a certain percentage of an employee’s final salary throughout retirement. Under a 401(k) plan, the company is responsible for a defined contribution, which is usually a match on employee contributions.

Without pensions, workers are on their own for retirement income.

The retirement income foundation for people without pensions is personal savings and Social Security. For the pension-less, retirement income is largely a personal responsibility, as opposed to an obligation of a company or government entity.

But even those with pensions could be in for rocky futures, according to Bogle.

That’s because many corporations, along with state and local governments, assume returns of 8 percent on the investments that fund their pension obligations. Bogle said those returns are simply not going to materialize over the next decade or so (he said 4 to 5 percent was more realistic).

If the investments don’t perform, that means corporations and governments need to pump more money into the plans or provide fewer benefits for pensioners.

The second piece of the foundation — Social Security — is on shaky financial ground. Bogle said it’s underfunded and in need of reform. If not, retirees may have to accept fewer benefits. And if we go too long without fixing the system, it may dissolve altogether.

Given the “iffy” health of Social Security, it’s scary so many will rely on it almost exclusively for retirement income.

This is where personal savings should fill the gap. But many Americans simply don’t have enough saved.

Take a look at the findings from the 2018 Northwestern Mutual Planning & Progress Study:

n One third have less than $5,000 in retirement savings.

n 21 percent have nothing saved.

n One third of Baby Boomers have $25,000 or less saved.

n 46 percent of those surveyed have not planned for outliving their money.

On top of that, Bogle pointed to another problem. A primary retirement savings vehicle — the 401(k) — is ill-suited for retirement savings for a few key reasons.

First, you can take your money out. Second, you can borrow from the account. And third, there is too much investment choice.

People derail their retirements by withdrawing money early from retirement accounts or taking loans from them. And, most people aren’t suited to picking investments. It can be overwhelming and complex.

All of these forces combined are why Bogle said we’re on course for a train wreck.

But it’s not all “doom and gloom.”

While 401(k) and similar plans aren’t perfect, they’re good options for most people. As the Northwestern Mutual study shows, the problem isn’t people saving in the wrong places — it’s that they’re not saving enough, period.

Saving more will obviously help.

Beyond that, there are tools and strategies available to help you live the retirement you want, even if the market doesn’t perform.

For instance, annuities and cash-value insurance (like an indexed universal life policy) can provide income in retirement, and they often have protections from market fluctuations.

When you think about it, a lot of this stuff is out of our control. It’s not like you or I can singlehandedly fix the Social Security system or any one pension fund.

So, control what you can control. Two great places to start are with personal savings and getting financial help from a trusted professional.

Increasing your savings basically gives future-you a raise. Who doesn’t like a raise?

Don’t forget, the retirement income responsibility falls primarily on your shoulders. It’s complex. Getting help could mean avoiding the train wreck, and ultimately be one of the best decisions you ever made.

Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at eliteretirementstrategies.com or by calling 208-252-4345.

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