More discussions on what is enough

[kmt1972]

See NYT "Suddenly, Retiree Nest Eggs Look More Fragile"

http://www.nytimes.com/2013/06/16/y...st-eggs-look-more-fragile.html?pagewanted=all

“It’s crazy that we ended up with this as our retirement system,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. The 401(k), she says, was intended as a supplement to a traditional pension and to Social Security. “It was supposed to be money that you could use to go to Paris,” she said. “Instead, it’s become our basic system.”

It also talks about

Choose to Save®

as a ballpark tool. I played around with it. Not as good as FIRE but useful to try.

 

[Spanky]

The article from NY Times is more concerned with the inability of people handling their own finance or investment than determining what's enough, albeit they are somewhat related.

 

[ERhoosier]

Another article supporting LBYM framed against the rather stark fiscal retirement reality facing many today. Clearly most do not have "enough". But IMHO there's nothing "sudden" about the "fragile nest egg" of many 55-64yo's (my age group). Obviously some have been financially hurt by recent downturn or misfortune & had to tap into their "nest eggs" early. But I've seen too many from all income levels who simply spent waaayyy too much of their discretionary income over their years vs saving seriously for retirement. Truth is 55-64yo's lived through overall great times for growth of their "nest eggs". Bond interest rates (until recently) were historically high & SP500 is up 1600% since 1980 (even with 2008/9 crash). DW & I were raised as LBYMers, and lived through decades of snide comments (even insults) from many friends & acquaintances over not spending 'enough' on cars, vacations, fancy restaurants, electronics, etc., etc. We had a solid savings plan (no pension), invested moderately, & now are FI (as are many on this forum).
Kudos to the author for raising awareness, and hopefully he will publicize some FIRE success stories to illustrate how it CAN still be done.
But at least some are already promoting a healthier view of retirement savings-

 

[bondi688]

http://www.nytimes.com/2013/06/16/y...st-eggs-look-more-fragile.html?pagewanted=all

“It’s crazy that we ended up with this as our retirement system,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. The 401(k), she says, was intended as a supplement to a traditional pension and to Social Security. “It was supposed to be money that you could use to go to Paris,” she said. “Instead, it’s become our basic system.”

401(k) is, and was, not meant to supplement traditional pension plans (so you can have that extra European vacation). It was meant to replace those unrealistic and unaffordable lifetime pension programs where people can retire after 20 years, and have lifelong payouts with COLA and health care benefits. Those programs had bankrupted private companies like the ones in the auto industries. Most of the remaining pension plans nowadays that still have generous terms and payouts are the public sector pensions, but they are operating under the illusion that there are unending well of public money to fund them.

 

[eridanus]

It was meant to replace those unrealistic and unaffordable lifetime pension programs where people can retire after 20 years, and have lifelong payouts with COLA and health care benefits. Those programs had bankrupted private companies like the ones in the auto industries.

Private pensions have been purposely underfunded by corporations eager to juice their numbers. Warren Buffer has a good explanation from his 2007 Letter.

"What is no puzzle, however, is why CEOs opt for a high investment assumption [for their pensions]: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire."

Assuming a high return means that the pension will be underfunded. That means that some CEO down the line has to make the hard choices and either 1) fund the plan; or 2) close down the plan. Most chose the latter.

 

[pb4uski]

You're confusing funding with accounting - they are not the same.

 

[LOL!]

In the article, a solution was proposed:

Because we depend on accounts like 401(k)’s, she said, we should strengthen them through measures like mandatory automatic enrollment and incentives for employee contributions of at least 10 percent of wages, with an employer match equal to half of those paycheck deductions.

Basically, pseudo-forced contributions of 10% of wages and employer contribution of 5%. A 15% contribution starting from one's first job would go a long way for the future.

The talk in this thread about private pensions and such is disheartening because even public pensions were not funded. Take the case of Illinois for instance. And Illinois pensioners apparently didn't pay into social security, so they are really screwed. http://www.npr.org/blogs/itsallpoli...on-crisis-this-is-what-rock-bottom-looks-like

 

[eridanus]

You're confusing funding with accounting - they are not the same.

Eh? They're inextricably linked, right? If a pension's discount rate is much higher than reality, then the funding can be much lower. This will create a shortfall when people start to retire.

The current rule basing the discount rate on 25 years of bond rates eviscerates whatever is left of any remaining private pension.

 

[clifp]

401(k) is, and was, not meant to supplement traditional pension plans (so you can have that extra European vacation). It was meant to replace those unrealistic and unaffordable lifetime pension programs where people can retire after 20 years, and have lifelong payouts with COLA and health care benefits. Those programs had bankrupted private companies like the ones in the auto industries. Most of the remaining pension plans nowadays that still have generous terms and payouts are the public sector pensions, but they are operating under the illusion that there are unending well of public money to fund them.

Exactly there seems be some perception both among some academic and some retirement writers, especially this NYT reporter Jeff, that there was some golden age of retirement where everybody had these pension.

There were always comparatively few blue collar workers (and almost entirely union) who could retire without saving money and still enjoy little no or reduction in their living standards once they retire. Among white collar workers really this was mostly public employee and a slim majority of Fortune 500 companies.

For everybody else the only way to retire and not see a big cut in your standard of living, was to do what most of the board members do. Save at least 10-15% of your salary, pay off your mortgage. Then because of lower taxes, no FICA, no mortgage payment, seeing your gross income cut in 1/2 or even a bit more in retirement is ok. Your expenses are much lower and social security takes up much of the slack.

Of course the majority of people never saved a lot and when they retired the learned to make do. It is difficult to find consistent number of how much retired people spend or earn. But if we look at the figure from the Social Security Admin and other sources.
The median SS check is $13,525 a year and social security is ~70% for the median family. This means total earnings are $19,300. Now this is challenging to live on in many places in the country (certainly NYC)

On the other hand the picture is better for couples
Average SS benefit for couples $24,576 implies an income of $35,100. If they started with a nest egg of $100,000 they spend an additional $3,000 a year this means they can spend $38K a year An amount which is more than many ER members are planning or do spend in retirement. Now it is true as the dip into the principal their earning decrease as the age...

The 401K provide a big incentive for people to save more and this is a good thing, and actually a big improvement from the good old days, when the vast majority had no retirement program.

 

[Tyro]

Illinois pensioners apparently didn't pay into social security, so they are really screwed. Illinois Pension Crisis: This Is What Rock Bottom Looks Like : It's All Politics : NPR

I thought this must've been a mistake, but there it was in the article:

The pension issue boils down to simple math. States failed to put away enough money to pay what they've promised their employees for their golden years. Since many public sector employees aren't covered by Social Security, their pensions are often their only retirement safety nets.

(Emphasis mine)

I thought SS wasn't an option. How does this work?

 

[bUU]

I believe public workers who were beneficiaries of public pension plans by 1983 were exempted from Social Security (because the presumption is that their pension will address that need).

 

[clifp]

I thought this must've been a mistake, but there it was in the article:

(Emphasis mine)

I thought SS wasn't an option. How does this work?

That is really good question, which I have spent a bit of time investigating over the last few years. I don't have the definitive answer, but some semi informed speculation. Meaning that if anybody knows the history please correct me.

The number of workers who receive benefits from Social Security and pay into the system has gradually been expanded over the decades. First it expanded to cover all private employees in various amendments. In 1957 the military was covered. Than in 1984 it included all Federal employees hired after 1984 as well as some hired before. (I am real fuzzy on the details of this.)

However, States and city public employees, with pensions plans are not required to join Social Security. Some states, and city employees have opted to join SS and many other have opted to stay out of the system. AFAIK all state and city employees are required to pay the medicare tax.

In order to prevent a form of double dipping their is enacted some complex legislation WEP and GPO which reduces SS benefit for state worker who collect pensions from states that aren't part of SS.

In many ways it makes sense for States to not participate in SS. SS is a much better deal for low income workers than high income workers, and most states and city have very few jobs at the minimum wage. So states felt it was better to contribute the 6.4% directly to their own pension fund, and the Union bosses were plenty happy to keep their members from having to by FICA taxes. Of course than you have states like Illinois, which have chronically underfunded their pension and now their workers are stuck. It is tempted throw the Illinois politician in jail but of course many reside their now

 

[Walt34]

I believe public workers who were beneficiaries of public pension plans by 1983 were exempted from Social Security (because the presumption is that their pension will address that need).

I worked for a county, and retired from there. The county did have the option of not paying for SS but elected not to so employees paid into both a pension plan and SS at the same 7.5% rate.

This gave me a lot more options when I retired as to when to take SS and what portion of the retiree benefits to take when. So in addition to a spousal benefit I (DW and I, really) took the option of "front loading" the pension benefits and then when I turned 62 the pension dropped by the amount of SS that I would have then been eligible for based on my SS earnings up to 2002, when I retired, the idea being to keep a level income. However, since I stumbled into the job I have now, that allows us to put off SS for several more years without tapping other funds and increase the later SS benefit.

So while we could get along without SS, it will make a difference.

 

[nun]

401(k) is, and was, not meant to supplement traditional pension plans (so you can have that extra European vacation). It was meant to replace those unrealistic and unaffordable lifetime pension programs where people can retire after 20 years, and have lifelong payouts with COLA and health care benefits. Those programs had bankrupted private companies like the ones in the auto industries. Most of the remaining pension plans nowadays that still have generous terms and payouts are the public sector pensions, but they are operating under the illusion that there are unending well of public money to fund them.

When added to the IRS code the 401k was meant to give a tax break on deferred income, not as a replacement for the defined benefits. The two types of scheme were seen as being complimentary. Unfortunately most companies took the opportunity to replace the traditional pension plan with the 401k to reduce their costs and shift the burden and risk of retirement saving entirely onto the employee.

 

[Independent]

Alicia Munnell is one of the usual suspects for retirement policy quotes. I usually disagree with her, so it's not surprising that I'd disagree with this:

... she said, we should strengthen them through measures like mandatory automatic enrollment and incentives for employee contributions of at least 10 percent of wages, with an employer match equal to half of those paycheck deductions.

The gov't already has one mandatory program that collects about 10% of payroll to provide old age benefits to former workers. That's enough to provide basic needs. If people want to save more, they can. If they don't, that should be their decisions.

Even if I thought a mandatory savings program were a good idea, "at least" 15% of wages, collected every year from when you start at McDonalds, is way too much. With reasonable assumptions, that would provide a 100% replacement ratio for a 40 year retirement.

 

[LOL!]

....
Even if I thought a mandatory savings program were a good idea, "at least" 15% of wages, collected every year from when you start at McDonalds, is way too much. With reasonable assumptions, that would provide a 100% replacement ratio for a 40 year retirement.

Not if most of the forced savings go to financial sales reps. Do you have a proposal that would ensure or force those "reasonable assumptions"?

Here's an idea: Forced savings unless/until one had $500,000 or a some other large amount in a government sanctioned retirement plan like the TSP. That way, folks would be forced to save unless they had already saved enough. And they couldn't blow their savings on weird investment plans or other odd things like starting a business.

 

[mickeyd]

In a recent Morningstar interview John Bogle made a point of saying that 401(k) plans were not designed to be a retirement plan, but were actually a thrift plan that has more flexability than a real retirement plan has. (Loans, emergency withdrawals etc. weaken the retirement value). We are stuck with it now.

 

[clifp]

Alicia Munnell is one of the usual suspects for retirement policy quotes. I usually disagree with her, so it's not surprising that I'd disagree with this:
The gov't already has one mandatory program that collects about 10% of payroll to provide old age benefits to former workers. That's enough to provide basic needs. If people want to save more, they can. If they don't, that should be their decisions.

Even if I thought a mandatory savings program were a good idea, "at least" 15% of wages, collected every year from when you start at McDonalds, is way too much. With reasonable assumptions, that would provide a 100% replacement ratio for a 40 year retirement.

I don't get how 15% saving can provide any where close to 100% replacement for a 40 year retirement. Every time I've tried to model it with a spreadsheet. I've come to the conclusion that combined (employee/employer) saving to provide an income replacement ratio 2%*salary*years of worked needs to be 25-35%. Looking at pension funds the only ones that are close to being fully funded have historically had this level of funding, and good investment returns.

In today interest environment with TIPS paying. ~0% real return, if you start working full time at 22, put in 40+ years for a 20+ year retirement you need to save 1/3 of your salary. Since you are only living on 2/3 of your salary than you only need 2/3 during return. Assuming a real return greater than 0% immediately brings up the host of issues that we discuss on the board every day.

 

[Focus]

While we're on the topic:

Father of modern 401(k) says it fails many Americans

An excerpt:

It was never Benna's idea for do-it-yourself to replace pensions. It just kind of happened...

Benna says the 401(k) was never meant to take care of everyone. It was simply a financial product that took off. And it did help middle-income Americans, tens of millions of them.

 

[Badger]

When added to the IRS code the 401k was meant to give a tax break on deferred income, not as a replacement for the defined benefits. The two types of scheme were seen as being complimentary. Unfortunately most companies took the opportunity to replace the traditional pension plan with the 401k to reduce their costs and shift the burden and risk of retirement saving entirely onto the employee.

I admit to being one of the least knowledgable members here and I don't want to be too picky but if the risk was entirely on the employee then I would have appreciated having all investment options available for me to choose from instead of a short list chosen/provided by the employer.

Cheers!

 

[bUU]

There is a big question in my mind why they didn't coordinate the tax deferral limits between 401ks and IRAs. It should be one limit, shared between the two forms, without any prohibitions on using the latter instead of the former, if you so choose. That would make 401ks viable only if they provide advantages superior to IRAs.

There must be some pretty strong 401k-specific lobby out there protecting 401ks, by ensuring that the limit on IRA contributions remains small, and ensuring that folks with a certain salary or higher, eligible for a 401k, cannot contribute tax deferred to IRAs.

 

[Independent]

Not if most of the forced savings go to financial sales reps. Do you have a proposal that would ensure or force those "reasonable assumptions"?

Here's an idea: Forced savings unless/until one had $500,000 or a some other large amount in a government sanctioned retirement plan like the TSP. That way, folks would be forced to save unless they had already saved enough. And they couldn't blow their savings on weird investment plans or other odd things like starting a business.

I'll agree that those forced savings could be chewed up with outrageous fees. That's a good reason to avoid a forced savings program.

I can't figure out why I should be telling my neighbor how much he should spend and how much he should save.

 

[MichaelB]

I'll agree that those forced savings could be chewed up with outrageous fees. That's a good reason to avoid a forced savings program.

I can't figure out why I should be telling my neighbor how much he should spend and how much he should save.

If as a society we choose to eliminate poverty as an objective, creating a mechanism to ensure adequate savings for retirement would be one aspect. Not all are equally competent to make the choices needed to achieve this. Telling each of us how much to spend and save is not the same as making sure minimum savings are in place.

 

[Independent]

I don't get how 15% saving can provide any where close to 100% replacement for a 40 year retirement. Every time I've tried to model it with a spreadsheet. I've come to the conclusion that combined (employee/employer) saving to provide an income replacement ratio 2%*salary*years of worked needs to be 25-35%. Looking at pension funds the only ones that are close to being fully funded have historically had this level of funding, and good investment returns.

In today interest environment with TIPS paying. ~0% real return, if you start working full time at 22, put in 40+ years for a 20+ year retirement you need to save 1/3 of your salary. Since you are only living on 2/3 of your salary than you only need 2/3 during return. Assuming a real return greater than 0% immediately brings up the host of issues that we discuss on the board every day.

I'll agree that my claim is way off if I assume a 0% real return.

I wouldn't use the current interest environment for long term planning. The the S&P has averaged 25% over the last four years, I wouldn't use that number, either.

I figured that if a worker saves 15% at age 25, and that money accumulates at 5% real for the next 40 years, he'll have 106% of his age 25 earnings at age 65.
If he saves 15% at age 26, accumulates at 5% real for 40 years, he'll have 106% of his age 26 earnings at age 66. etc. 40 years of earnings provides 40 years of retirement.

I know that his earnings are likely to go up faster than inflation, so I'm just replacing his "average, inflation-indexed earnings" instead of his highest earnings. OTOH, most people have some earnings before 25, and in the future people will probably work past 65.

Is the 5% realistic? Who can know? Shiller's stock data gives an average compound real return of 6.82% for 1925-2013. The worst 35 year stretches were around 5%. If I do a 40/60 blend of 3% (a guess on historic bond yields) and 6.82%, I get 5.3%.

(You seem to have some information on pension plan funding, can you give me a source?)

 

[Independent]

If as a society we choose to eliminate poverty as an objective, creating a mechanism to ensure adequate savings for retirement would be one aspect. Not all are equally competent to make the choices needed to achieve this. Telling each of us how much to spend and save is not the same as making sure minimum savings are in place.

I agree that if people arrive at old age with no savings and no income, the rest of us a likely to be called on to support them. That's why I support the Social Security program. In my first post, I said that I think that SS is enough "mandatory" stuff. Beyond that, I would rather not claim that I am more "competent" than my neighbor in handling his finances.