PBS FRONTLINE - "The Retirement Gamble" 4/23

[nun]

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Originally Posted by clifp The Vanguard guy nails it IMO. God knows there are problems with our retirement system, but #1 is people don't like to save money. "I can't be broke I still have limits on my credit card, and checks in my checkbook." #2 the good old of retirement never really existed and recent changes allowing company to nudge employees into making smarter choices are big step in the right direction. If the impact of fee disclosure has been to see a reduction of fees that is very good thing also.

I think it's all a matter of emphasis and perspective. Having only 60% of people being prepared for retirement is pretty sad, but the Vanguard blog is saying its not that bad at all. Of course I bet being "prepared" relies of annual returns that most on here would consider very optimistic. DB plans got too expensive in part because of overly optimistic performance expectations, I think the same holds true for DC plans. How many people are prepared for retirement if they use annual returns in the 4% range?

While I like Vanguards products and contributions to financial services, they have as much of a bias as the Frontline show. They provide DC retirement plans, so they are not going to come out and criticize them in anything other than a way that emphasizes their low coat advantages over the likes of JPM. They have a vested interest in the status quo.

[steelyman]

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Originally Posted by timo2 That's why I quit watching frontline so much: I see reality every day, why have reality perfectly portrayed on TV. For the same reason, I can't watch the show 'madmen'. It's too realistic and reminds me of the bad old days.

Some friends turned me on to "Mad Men" and I like it. I especially like the appearance of an actor who was on Lynch's "Twin Peaks ".

But I don't regularly watch FRONTLINE either. I just noticed this one show and here we are. I invest in both Vanguard and Fidelity, less filling/tastes great.

[pb4uski]

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Originally Posted by clifp The Vanguard guy nails it IMO. God knows there are problems with our retirement system, but #1 is people don't like to save money. ....

+1 That and it was interesting that even in its heyday only 4 of 10 employees had DB pension plans.

[nun]

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Originally Posted by pb4uski +1 That and it was interesting that even in its heyday only 4 of 10 employees had DB pension plans.

And today only 5 of 10 employees have DC plans and the average balance for those within 10 years of retirement is $78k. No a particularly happy picture.

But I agree that people not saving is the most basic problem.

[scrabbler1]

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Originally Posted by clifp The Vanguard guy nails it IMO. God knows there are problems with our retirement system, but #1 is people don't like to save money. "I can't be broke I still have limits on my credit card, and checks in my checkbook." #2 the good old of retirement never really existed and recent changes allowing company to nudge employees into making smarter choices are big step in the right direction. If the impact of fee disclosure has been to see a reduction of fees that is very good thing also.

+1. And remember there is risk in private sector pensions. Back in 2001 my company changed its pension plan greatly, grandfathering older employees under the old system while freezing it for younger employees (and eliminating it as a benefit for new hires). I was in the second group so that move resulted in my projected pension benefit never increasing as long as I worked there. At least my 401(k) could and did still go up in the next 7 years I worked there before I ERed. Yes, it did go down in 2008 but its successor, a Rollover IRA, has bounced back and then some.

[bUU]

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Originally Posted by walkinwood Vanguard's blog has an interesting response to the frontline piece. They make some very good points. The 401(k) debate | Vanguard Blog

I'm not sure what program the author of this article watched, but he claimed that the program started with two misconceptions: One of the two is actually not a misconception. It is reported that most Americans are indeed not ready for retirement by multiple sources, based on multiple measures, and even if the number is somewhere just about half its still a big problem.

The other of the two was simply untrue: The author of the article complained that the program implied that most Americans had pensions in the past, when the program clearly stated that the number was 40% IIRC.

The author of the article goes on to challenge the contention that the growth of 401k's is harmful to employees but doesn't defend his statement. So he just disagrees with the program, but doesn't have a reason why. He seems to be unable to comprehend that this newer means of securing an employee's financial security in retirement spreading doesn't necessarily mean it is a better mechanism, from the employee's standpoint, than the older means.

The author mentions consumption and then fails to adequately acknowledge that two-thirds of the US economy relies on consumer spending and therefore a nationwide conversion to cutting spending to save for retirement will likely destroy the economy.

The article touts how much progress has been made regarding fees, without presenting such advances in any kind of context. I especially resent (from a personal standpoint) the implication that employers give of themselves to move to less expensive fund classes. I see no evidence of that, personally, and certainly haven't heard of any significant trend toward that.

[clifp]

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Originally Posted by pb4uski +1 That and it was interesting that even in its heyday only 4 of 10 employees had DB pension plans.

It is important to understand that the 40% figure who had pension actually overstates the availability of defined benefit plans. A classic example is the US military. It offers a terrific defined benefit that you can take at any age, and includes almost free medical coverage.

But there is a tiny little catch. Unless you serve 20 years, you get no pension. Nords says that only 17% of that join the military stick around for the full 20 year to get the pension. So while US armed service personal are covered by a great DB plan, it is of no use to 83%.

Before the various retirement and pension reforms were passed starting in the 70s and 80s. Most companies required a 7 year vesting period and 10 years was not uncommon. Imagine you worked for a typical company with 10% turnover, less than 1/2 the employees will make it to 7 years, even with a low turn over of 5% (typical of older larger companies) a 7 year vesting schedule means only 70% actually qualify.

You add the vesting issues together, with the fact that the vast majority of American work for small and medium business (Fortune 500 accounts for 20-25% of US employment) and very few firms outside of Fortune 1000 every offer a pension plan, and you can see the pensions have always been rare. My estimate is that no more than 1/4 to at most 1/3 of people every collected a private pension at the peak of their popularity.

Finally, historical perspective is worth considering. Tens of millions entered retirement at about age 65, since WWII. American's have never been particularly good savers (albeit much better than the boomers), most had social security, a minority had pension, and while many have become fairly poor in their old age. Most haven't had to resort to eating catfood to live. We have more retirement saving options and more understanding about retirement now than any time in our past. So I don't think panic is in order, just concern.

[clifp]

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Originally Posted by nun And today only 5 of 10 employees have DC plans and the average balance for those within 10 years of retirement is $78k. No a particularly happy picture. But I agree that people not saving is the most basic problem.

But even if you don't have employee DC, if you earn income you have access to IRA. Pre 1974, the choice American had for retirement saving were very limited a lucky few had pension, and small number of those were vested in a pension. But for the vast majority of Americans that no way of saving retirement in a tax deferred manner.

[mpeirce]

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Originally Posted by clifp But even if you don't have employee DC, if you earn income you have access to IRA.

And you can certainly save for retirement in a non-tax advantaged account.

I have tax advantaged accounts - my CPA would hit me over the head if I didn't - but there is no way I could have FIREd if I depended solely on them.

Frankly, they are a mixed bag. Yes you (probably, depending on tax rates over your lifetime) end up with more money in the end using a 401(k)/IRA, but you have to abide by the rules - contribution limits, specific times when you have access to your money without penalties, possibly paying higher tax rates on your gains, etc.

Tax advantaged accounts fall into that broad category of things the government decided were worth encouraging using tax incentives - like home ownership and having kids. Regardless of the tax treatment, motivated people will own homes, have kids - and save for retirement.

We really have to remember that saving for retirement (and home ownership, etc) is worth doing because it is worth doing. Not just for the tax savings...

[Texas Proud]

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Originally Posted by nun And today only 5 of 10 employees have DC plans and the average balance for those within 10 years of retirement is $78k. No a particularly happy picture. But I agree that people not saving is the most basic problem.

I am using the number you gave....

First, I calculated an annual contribution rate based on a 4% return... that would be about $6,500 contribution per year to the plan... IOW, $6500 contributed each year growing at 4% will get you about $78K after 10 years... (this seems like a high contribution amount, but it is based on what you said are real balances)...


Now, keep contributing that amount with the 4% return... at the 30 year mark you will have over $364K.... at 35 years over $478K... at 40 years over $617K.... this calculation does not take into account any raises in those 40 years....

So, you started working at 25 YO, worked 40 years and are now 65... you have a DC balance of $617K.... that gets you an annuity of about $3,500 per month... add SS in and that is not a bad option...


So, a DC plan can be pretty good to a long term employee that does not save anything on their own...

[Midpack]

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Originally Posted by bUU The author mentions consumption and then fails to adequately acknowledge that two-thirds of the US economy relies on consumer spending and therefore a nationwide conversion to cutting spending to save for retirement will likely destroy the economy.

Though consumer overspending (debt) can also 'destroy the economy' - it appears to be a tricky Catch-22 proposition to some extent. However, I don't pretend to know what level or range of consumer spending might be ideal.

[bUU]

It isn't even clear that the current level of spending isn't the ideal. In other words, the issue could also be ideal is a reflection of changing other variables in the system.

[nun]

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Originally Posted by Texas Proud I am using the number you gave.... First, I calculated an annual contribution rate based on a 4% return... that would be about $6,500 contribution per year to the plan... IOW, $6500 contributed each year growing at 4% will get you about $78K after 10 years... (this seems like a high contribution amount, but it is based on what you said are real balances)... Now, keep contributing that amount with the 4% return... at the 30 year mark you will have over $364K.... at 35 years over $478K... at 40 years over $617K.... this calculation does not take into account any raises in those 40 years.... So, you started working at 25 YO, worked 40 years and are now 65... you have a DC balance of $617K.... that gets you an annuity of about $3,500 per month... add SS in and that is not a bad option... So, a DC plan can be pretty good to a long term employee that does not save anything on their own...

The $78k is the average (mean) retirement account balance for those within 10 years of retirement, so thats after 30 years of saving, but that came from an article that was a couple of years old and looking around I found some numbers for 2013 that put the mean retirement account balance for those between 55 and 65 at about $120k. Of course maybe the mode would be a better number to use when estimating how the people are set for retirement. Anyway going with the $120k with 4% annual return over say 30 years the annual contribution rate is $2060. If the contributions and return stay the same for another 10 years the final 401k pot is $203k implying an annual income at a SWR of 4% of $8k.........

Of course this doesn't include other savings, pensions or SS, but it's not a number that inspires confidence.

[Texas Proud]

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Originally Posted by nun The $78k is the average (mean) retirement account balance for those within 10 years of retirement, so thats after 30 years of saving, but that came from an article that was a couple of years old and looking around I found some numbers for 2013 that put the mean retirement account balance for those between 55 and 65 at about $120k. Of course maybe the mode would be a better number to use when estimating how the people are set for retirement. Anyway going with the $120k with 4% annual return over say 30 years the annual contribution rate is $2060. If the contributions and return stay the same for another 10 years the final 401k pot is $203k implying an annual income at a SWR of 4% of $8k......... Of course this doesn't include other savings, pensions or SS, but it's not a number that inspires confidence.

AHHH, misread your original post.... I did say that I thought that the $6,500 was high...

[nun]

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Originally Posted by Texas Proud AHHH, misread your original post.... I did say that I thought that the $6,500 was high...

Yes, it was an easy miss. Your comment that "$6.5k is a bit high" is one of the critical problems with the current state of retirement accounts. Given a mean US annual income of $70k (median is around $50k) and the advice to save at least 10% of gross income and a 3% employer match the minimum level of saving should be $9100/year. The average 401k contribution for 2012 was actually $2733.

People are just not saving enough. DB plans failed or became unsupportable after years of companies not funding them enough or seeing them as a drain in their profitability and competitiveness. DC plans are also not funded enough or are seen as an unsupportable drain on the family budget. Whatever retirement saving mechanism you choose, you have to fund correctly and use conservative estimates of returns to have any hope of success.

[Midpack]

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Originally Posted by nun DB plans failed or became unsupportable after years of companies not funding them enough or seeing them as a drain in their profitability and competitiveness.

IOW, companies recognized the demographic trends and acted to offload the associated risk, to make earnings more stable and predictable. Same issues Soc Sec & Medicare face, though so far largely no action to address the "risk."

Only one example, but my former employer spent more per employee on DC-401K matching than they did on the DB plan we had until 1994. The employer contributed 3½-4½% per employee for the DB plan (in the early 90's, presumably even less before that). The employer contributed up to 5½% in DC-401k match per employee if the employee contributed 6% (or more) themselves. For my employer, 401k participation was pretty high, about 85% at my location.

[pb4uski]

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Originally Posted by nun ...DB plans failed or became unsupportable after years of companies not funding them enough or seeing them as a drain in their profitability and competitiveness. ...

I think the bigger reason that companies have turned from DB to DC plans is that the earning impact of DC plans is much more predictable, and the DB plans have much more investment risk and most companies would prefer not to take on the investment risk associated with DB plans.

[nun]

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Originally Posted by pb4uski I think the bigger reason that companies have turned from DB to DC plans is that the earning impact of DC plans is much more predictable, and the DB plans have much more investment risk and most companies would prefer not to take on the investment risk associated with DB plans.

Surely DB plans are invested in similar ways to DC plans. I can see why companies would want to pass the investment risk and hassle onto the employee.

[timo2]

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Originally Posted by pb4uski I think the bigger reason that companies have turned from DB to DC plans is that the earning impact of DC plans is much more predictable, and the DB plans have much more investment risk and most companies would prefer not to take on the investment risk associated with DB plans.

I have been under the impression that companies turned from DB plans in a simple survival strategy, because the large amounts of money in the pension plans made them targets for corporate raiders.

[pb4uski]

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Originally Posted by timo2 I have been under the impression that companies turned from DB plans in a simple survival strategy, because the large amounts of money in the pension plans made them targets for corporate raiders.

You've been watching too many movies.