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Solving the Retirement Savings Riddle

3/24/2014

The headlines:

EBRI reports the average 401(k) account balance was $63,929 at the end of 2012; the median was $17,630. Even factoring in higher balances based on age, tenure, and salary, many individuals will not have sufficient savings for a secure retirement.
EBRI finds only 18% are "very confident" of having a financially secure retirement; what's more, 58% of workers and 44% of retirees are facing debt challenges (EBRI)
A Wharton School study found that 90% of 401(k) plans force a distribution when a participant leaves employment, with an extraordinarily high percentage of workers defaulting on repaying the loan, resulting in plan leakage. Benefits attorney Bob Toth's very thought-provoking blog entry noted, "[T]his traditional plan design imposes a severe financial hardship upon those who involuntarily lose their jobs, at a time when they can least afford it."

I will leave it to those with expertise in plan and product design to create great solutions, but my personal experience set me to thinking about what can be done differently to encourage retirement savings AND solve CURRENT financial challenges. One idea that came to mind was what if instead of penalizing people who are undergoing a major financial challenge, we made it easier for them to get back on their feet AND helped everyone save more for retirement at the same time? For those who are laid off, the focus is on the immediate future. What if we came up with a way to allow individuals to have an emergency fund that would cover the period of financial stress, but via greater contributions to a 401(k) plan? Instead of imposing penalties for early withdrawal, what if individuals could repay it AFTER they returned to employment? Instead of imposing on taxpayers for assistance, many of whom already feel financially stretched, you would access your own funds.

The 10% early withdrawal penalty was designed to discourage access to retirement funds before what one usually thinks are the retirement years. If it were too easy, then retirement savings would not be there during those retirement years. For many of those who are accessing retirement funds, however, it is more a matter of necessity than of choice. The attached visual piece is an attempt to outline the problem and suggest a solution. It is meant as a starting point, open to fine tuning along the way. If we think of retirement as part of the overall financial picture, and not simply an isolated moment, then I think we can finally generate a more realistic solution. Telling people they need a million dollars for a secure retirement is counterproductive. Helping people solve their own financial riddles will produce positive results.

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Retirement Confidence Improves, But Is Still Weak - How Can We Solve This?

3/19/2014

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The Employee Benefit Research Institute (EBRI) has released its annual Retirement Confidence Survey (RCS). While there has been somewhat of an uptick over recent results, the overriding message is that most Americans are either not confident or are uncertain about having enough savings for a secure retirement. The 18% who are very confident about having a secure retirement is an improvement over last year's 13% figure. Another 24% indicated that they were not at all confident. Clearly, there is a lot of uncertainty out there. Other key points from the RCS:

Higher confidence correlates with higher household income and household participation in a retirement plan.
Retiree, as distinguished from current worker, confidence, jumped up 10 percentage points to 28% who are very confident.
Confidence in the ability to afford retirement expenses also has rebounded slightly but the overall figures are still on the low side (29% very confident).
Debt is on the mind of many workers. According to the RCS, 58% of workers and 44% of retirees are having debt-related challenges. What's more, 24% of workers and 17% of retirees report higher levels than from 5 years ago.
Many have minimal or no retirement savings, with 60% of those surveyed reporting $25,000 or less, including 36% with less than $1,000 saved.
More than half (53%) of workers say that the cost of living and day-to-day expenses are the primary reasons for not saving enough for retirement.

How do we solve the confidence problem? While the RCS points out that there are some signs of improvement, I think that the bigger picture is that there is still a very long way to go for people to feel generally more optimistic. Debt and everyday expenses are on the minds of many. How can we talk to people about saving for the future when the present is its own challenge? Telling people that they need to save more for retirement is all well and good, but it doesn't get at more immediate needs. Creative ideas that will resolve both current and future challenges is what is needed.

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Retirement Savings Easier Said Than Done

3/11/2014

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Ameriprise Financial has released a report that quantifies what this blog suggested in our initial post - there is a disconnect between the desire to save more for retirement and the reality of doing so. Simply put, most people do have the desire to save for the long-term, but meeting short-term needs tends to take priority. The Ameriprise study focused on three demographic groups - Baby Boomers, Gen X, and Millenials. Here are some of the more interesting findings:

Roughly three in five have cut back on discretionary spending such as dining out, entertainment, and clothing/shoes in order to save more.
One in four have cut back on bigger ticket items such as mortgage/rent and college education expenses; one in two have seen big savings by cutting back on vacations.
Four out of five individuals with student or business loans feel financially stretched.
While Boomers consider themselves to be savers more so than does either GenX or Millenials, the Boomers have tended to cut back less on spending than the other two groups.
A surprising three in five Boomers aren't too concerned about how much of an inheritance they will leave.
Millenials have tended to cut back more than the other two groups on big ticket items, but they also feel extremely stretched financially. About seven in ten have either reduced contributions or thought about doing so.

While the study's conclusion that today's trade-offs will boost future financial goals is true enough, I think the one additional focus that is needed is helping people better navigate the current challenges, especially when they do get in the way.

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Social Security a Lifeline for Many

3/5/2014

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Once upon a time, defined benefit plans were the retirement plan of choice for most employers. The defined contribution plan, primarily in the form of the 401(k) plan, resulted in a major shift toward participants taking more responsibility for their own retirement savings. Unfortunately, many individuals are not skilled investors, resulting in a widespread savings shortfall. Add other financial challenges to the mix and the challenge is even greater. With DB plans declining and DC plans producing inadequate savings, many have turned to Social Security as their primary, if not sole, source of income in retirement. AARP highlights some key Social Security data:

In 2012, over 43 million Americans were over age 65; that's about one in seven out of a population of 313 million.
92% of those over age 65 receive Social Security benefits
Roughly two out of every three retirees receive Social Security benefits
$775 billion in Social Security benefits are distributed, with $1.4 trillion put back into the economy
Without Social Security, 44% of the 65+ population would have income below the poverty line
32% of Americans age 65+ rely solely on Social Security

Social Security remains an important piece of the retirement puzzle. Ensuring its availability for future retirees should be top of mind for the foreseeable future.

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Solving the Retirement Savings Riddle

Retirement Confidence Improves, But Is Still Weak - How Can We Solve This?

Retirement Savings Easier Said Than Done

Social Security a Lifeline for Many

Blog Author - Ken Felsher

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