Retirement plans too risky?

[FinallyRetired]

This columnist comments on a report called Retirement 20/20 that claims 401k's are too risky. One participant compares self-directed 401k retirement investing with performing minor surgery on yourself.

"Emily K. Kessler's job is all about risk. She's not a stunt double, or a fighter pilot, or even a preschool teacher (think of the germs!). She's an actuary -- she studies risk for a living.

So when Kessler decides something is unduly risky, it's worth listening. Her current concern: retirement plans. Kessler, who works for the Society of Actuaries, wrote the report for a group called Retirement 20/20, a collection of pension and financial experts who took a look at the troubling transformation of our nation's retirement systems."

http://www.washingtonpost.com/wp-dyn/content/article/2007/05/04/AR2007050402671.html

I'd like to look for connections between the Society of Actuaries and brokerages.

 

[Spanky]

May be an insurance policy to protect your retirement assets can come to the rescue.

 

[maddythebeagle]

This columnist comments on a report called Retirement 20/20 that claims 401k's are too risky. One participant compares self-directed 401k retirement investing with performing minor surgery on yourself.

I guess he had never heard of Target Retirement....

 

[teejayevans]

This columnist comments on a report called Retirement 20/20 that claims 401k's are too risky. One participant compares self-directed 401k retirement investing with performing minor surgery on yourself.

Technically no, I give money to a professional who invests it (VG, FIDO, etc),
at least for the 401k, even an index fund has a someone who is picking
the stocks. I'm not a race car driver, but I drive a car, I'm not a doctor, but
I give myself asprin when I have a headache, I'm not a dentist but I floss
my own teeth. Every so often, I get help from a pro (except the race car
driver ;-) ), ditto with investments, I don't see a problem?
TJ

 

[LOL!]

That PBS show on retirement showed that alot of people are just plain stupid uneducated when it comes to their 401(k). In particular, the guy that retired early, withdrew his entire 401(k) and only then realized that he had to pay 10% penalty and income taxes on the money was a classic. He was left holding only half the bag.

Maybe the masses need lessons. So the government could have mandatory classes and exit exams before you can graduate to retirement. You know, No Geezer Left Behind.

 

[Gone4Good]

Risk, and the perception of risk, is an interesting and poorly understood thing. People greatly fear infrequent headline grabbing risks like airplane crashes and shark attacks but will not think twice about getting behind the wheel of a car and hurling themselves down the highway at 80 mph with oncoming traffic just a few meters away. Similarly, people fear the volatility of financial markets but less so the long-run solvency of their employer or the unfunded promises of politicians.

Planning for an uncertain future is by definition a risky thing. Relying on companies or social programs to do it for you does not eliminate that risk. In fact, the false sense of security provided by these other schemes probably keeps people under prepared and undereducated with respect to their own financial wellbeing, likely increasing their actual risk while soothing their perception of risk.

 

[FinallyRetired]

I found a link to the original Retirement 20/20 site, including the 47 page report.
http://retirement2020.soa.org/
There's a shorter version but it's still 20 pages. For those like myself whose bureaucratic career atrophied their reading skills, here are some Power Point presentations.
http://retirement2020.soa.org/presentations.php

 

[Helen]

You know, No Geezer Left Behind.

 

[kcowan]

I like Kessler's 6 point program.

Those include :

• clarifying whether employers should be responsible for retirement security,
• recognizing that any serious fix also requires improvements in health-care and long-term care systems,
• looking for ways to use markets to reduce risks, and
• pooling the risks and contributions to produce the greatest benefit to the largest number of participants.

I had trouble separating the columnist's opinions from Kessler's other than the above. And I can agree with them more than the solutions proposed by the columnist.

 

[Spanky]

The biggest risk is reliance on someone else (i.e., the government, employers) for your retirement and health care. Educate yourself about the financial markets, investments and take steps toward a healthy life. It's true that we still need the government for basic services and security of the country, but we are responsible for the rest.

 

[Mwsinron]

The biggest risk is reliance on someone else (i.e., the government, employers) for your retirement and health care. Educate yourself about the financial markets, investments and take steps toward a healthy life. It's true that we still need the government for basic services and security of the country, but we are responsible for the rest.

I tend to agree with that. I have known people with over a hundred thousand dollars in their retirement plans and they could not give me an idea of their fee ratio. Even if you have someone else manage your money a person should not be that ignorant about it.

 

[megacorp-firee]

Anyone that takes the time and trouble to read and contributes to this site is usually way ahead of the average person. The posting is correct, the average person is not very knowledgeable about finances and funding their retirement.
I don't think that this applies to 'us'.

 

[Culture]

"Why would any reasonable person think that people not trained in investments would be able to make these decisions in a sensible way?" asked 20/20 participant Zvi Bodie, professor of management at Boston University. "I've been teaching investments for 35 years, so to me it's second nature. But let's take an area like medicine.

"Now, I consider myself a reasonably well informed consumer of medical services, but I wouldn't dream of diagnosing my own illnesses . . . even if my doctor said, 'You know, performing minor surgery is really not such a big deal. I can give you the equipment and a brochure, and you can take care of it on your own.' That's what we're doing now with 401(k) plans."

It makes me cry for the future of America a professor of management at BU suggest that I put my future in the hands of investment managers who, on average, lag the market, because I am an idiot and they are sooooooo smart.

Oh wait, he training the guys who lag the market, and they need jobs so he can make a living, training for financial salesmen! Yeah, that right ... give the money to my over-payed students. That's the ticket!

If doctors performed like financial advisors, I would not go to the doctor either.

(Yes, there are good financial advisors, but they are few and far between, perhaps 10-25% of the total. Most are concerned solely with maximizing their income. If this makes their clients money too, great, but that is a side effect, not the intent)

 

[FinallyRetired]

I don't think that this applies to 'us'.

I hope not, but I'm extremely careful to not drink anyone's kool aid, especially my own. Like most here, I have a fairly well diversified portfolio of income, bonds, and equity. All the equity is in diversified funds including US and Int'l. So I guess I should ignore scare stories and sleep. While I think this columnist missed the point of the conference she was reporting on, and in addition wrote a bad column, there is an underlying assumption to our strategies that causes me some concern.

With social security, the system is in trouble because there will not be enough workers to support those who depend on drawing from the system for their retirement. It's debatable exactly when this will occur, how it can be fixed, etc, but no one questions the fundamental problem of too many retirees and not enough workers.

My concern with the markets is along a similar vein. If most retirees, us included, are depending on the markets for our retirement, then the market must throw off a certain average return, say the long term average of 7% above inflation. But this long term average is calculated over years where the main retirement sources were defined benefit plans and social security. We are now changing to a 401k based system where the main retirement source will be the market itself. So the question arises, with an increasing number of retirees, can companies keep growing earnings at a sufficient rate to support retiree financial needs?

This question was raised in a book that I read several years ago, can't recall if it was one of Glassman's or perhaps the Great 401k Hoax by Wolman and Calamosca. When I read it I was struck by the importance of the question, but kept whistling past the graveyard without taking a closer look.

So, the aforementioned column aside, how sure are we that the market can support us all?

 

[mickeyd]

To say that many of our fellow citizens are not prepared for their retirement future reminds me of a conversation that I had about 3 months ago with a neighbor of mine. This fellow is an attorney in private practice and on the subject of investing for retirement he advised me that almost all of his retirement savings were in a bond fund with Merrel Lynch.

I started talking about asset allocation, time horizon, S/D and risk/reward, indexing etc. He was speechless. It turns out that he had never heard of these terms nor these concepts. A 45 year old lawyer!

I suggested that he pick up "Boglehead Guide to Investing" and bone up on a few of the basics.

I saw him about a month later and he said that he had read the book twice and was embarrassed at how ignorant he was on the subject. He is now on to bigger things~Bogle, Brenstein, Siegel, Graham, Swedroe, Ferri etc.

 

[Gone4Good]

If most retirees, us included, are depending on the markets for our retirement . . .

I strongly question the assumption that most people are relying on the markets to finance their retirement. Given the savings rate in the US it looks like most folks are relying on a combination of home equity and working until they drop. In either event, I don't think we'll see the liquidity drain from the market that some academics fear.

Besides, the equity market is not a closed system. Aging Europeans and Americans will be replaced with the relatively younger and faster growing populations of today's developing nations.

 

[FinallyRetired]

In either event, I don't think we'll see the liquidity drain from the market that some academics fear.

I've bet my retirement on that assumption, as have many others. The risk is that we're wrong, but unless I find a better alternative, I have to remain in the market. By the way, the GAO agrees with you. Here is their report, written for the ultimate reading-challenged bureaucrat who only has time to read the title:

BABY BOOM GENERATION: Retirement of Baby Boomers Is Unlikely to Precipitate Dramatic Decline in Market Returns, but Broader Risks Threaten Retirement Security

The "but" is summed up in the following paragraph:

"While the boomers’ retirement is not likely to cause a sharp and sudden
decline in asset prices, the retirement security of boomers and others will
likely depend more on individual savings and returns on such savings. This is
due, in part, to the decline in traditional pensions that provide guaranteed
retirement income and the rise in account-based defined contribution plans.
Also, fiscal uncertainties surrounding Social Security and rising health care
costs will ultimately place more personal responsibility for retirement saving
on individuals. Given the need for individuals to save and manage their
savings, financial literacy will play an important role in helping boomers and
future generations achieve a secure retirement."

http://www.gao.gov/new.items/d06718.pdf

 

[haha]

(Yes, there are good financial advisors, but they are few and far between, perhaps 10-25% of the total. Most are concerned solely with maximizing their income. If this makes their clients money too, great, but that is a side effect, not the intent)

There are some good ones who post here. Also they are not thin-skinned.

Ha

 

[chinaco]

Even pension plans rely on the markets. It is a matter of risk and managing the risk. The article pointed out some valid concerns. A protrative downturn in the market could upset everyone's applecart.

The one point that hit home with me was the power of the "Pooling of Money". If money is pooled across age groups and people with a variety of life expectancies... that provide another dimension that can be leveraged to manage risk.

However, pooling money comes with a down-side in tools like a pension... there are no residual assets left for the individual (no inheritance), the money goes to the people in the plan.

I am a big believer in creating an income floor through the use of an instrument like a SPIA with a long-time AAA rated insurance company. Done properly, it can better ensure that one is not left out in the cold. The down-side is the loss of the assets at the end, of course, if you or spouse live longer than average, you will benefit.

 

[youbet]

Even pension plans rely on the markets........I am a big believer in creating an income floor through the use of an instrument like a SPIA with a long-time AAA rated insurance company.

If the pension plan and the insurance company are both AAA rated, etc., wouldn't market performance impact the pension plan and the SPIA in the same way?

 

[chinaco]

If the pension plan and the insurance company are both AAA rated, etc., wouldn't market performance impact the pension plan and the SPIA in the same way?

Yes and No... They typically buy long-term bonds and rely on the coupons... The company absorbs the market risk. One of the main benefits to the owner is the pooling of money. Two notable risks are: 1) Inflation (you need to deal with it somehow) and 2) company risk (hence the triple A).

You could try to duplicate the income stream with high grade bonds (you would have less diversification). What you cannot do is pool money. Essentially with a high quality Insurance company, one is paying for a pension with professional management.

Some people do not believe in them... I believe they have a place... and that is for creating a basic floor income stream.

 

[youbet]

Yes and No... They typically buy long-term bonds and rely on the coupons... The company absorbs the market risk. One of the main benefits to the owner is the pooling of money. Two notable risks are: 1) Inflation (you need to deal with it somehow) and 2) company risk (hence the triple A).

You could try to duplicate the income stream with high grade bonds (you would have less diversification). What you cannot do is pool money. Essentially with a high quality Insurance company, one is paying for a pension with professional management.

Some people do not believe in them... I believe they have a place... and that is for creating a basic floor income stream.

Your answer doesn't make sense and I'm thinking we're talking about two different things ref "pension." By pension, I mean a corporate or governement DBP pension. Perhaps you're referring to a contributory situation such as a 401K?

 

[kcowan]

Your answer doesn't make sense and I'm thinking we're talking about two different things ref "pension." By pension, I mean a corporate or governement DBP pension. Perhaps you're referring to a contributory situation such as a 401K?

Yes he is referring to someone without a DBP. It is essentially buying yourself an equivalent to a DBP. To me it makes sense as a hedge against inflation, especially for anyone likely to live longer than average.

 

[slepyhed]

...To me it makes sense as a hedge against inflation, especially for anyone likely to live longer than average.

How about for someone likely to *BE RETIRED* longer than average?

Isn't that what we should be worried about? After all, it seems to me that someone who retires at 65 and lives until 95 faces the same financial challenge as someone who retires at 45 and lives until 75.

Traditonal retirements last 10-20 years, I think. I'm aiming to be retired for 30, 40 or more years.

 

[WM]

So the question arises, with an increasing number of retirees, can companies keep growing earnings at a sufficient rate to support retiree financial needs?

So, the aforementioned column aside, how sure are we that the market can support us all?

I apologize for not being able to be more specific, but I remember getting a "newsletter" from TRowe or someone addressing this question, and it pointed out that individual households with average/modest incomes only own something like 20% of the market. In other words, the market isn't supporting "us all," most of it is owned by insitutional investors and the extremely wealthy who won't be draining the money out any time soon.