The "Retirement Crisis" is worse than we thought

[Retirement Nerd]

When I joined my megacorp, the CEO was paid about 40x what a starting engineer made. About the same as a MLB pitcher.

Today it's about 400x. Again, about the same as a MLB pitcher.

Of course, today the CEO manages 100,000 fewer employees. Baseball season is still 162 games.

I once saw a documentary that stated the Greeks said an employer shouldn't make more than 10X the lowest paid employee. Andrew Carnegie (considered a "Robber Baron") said no more than 21-25X the lowest paid employee. Many corporate executives today blow that standard out of the water. Hence, we now have the wage gap in this country no one hardly talks about.

 

[Souschef]

Yes I knew a number of engineers who went there and "lived large". Then they returned and worked for the man the rest of their lives.
Even when I worked in Manila and Kuala Lumpur, there were guys who lived to the limits of their earnings. It seems to be a mind set for certain people.
We will not meet them on this board.

I understand completely. I was a Field Engineer for 3 years in the Far East and Scotland. I lived on my perdiem and banked my salary. Plus, i was out of the country long enough I did not pay any income tax. I was also young and had not yet developed any bad habits.
I did know a bunch of others that blew their money on booze and women, plus spent it on foolish things.

 

[samclem]

My only issue with 401k type of accounts right now are the fact they will lose value when someone may be "forced" retired because of the economy.

That can happen, but a traditonal pension wouldn't help such a person a bit (unless they were already retirement eligible). It is a risk worth protecting against, to include keeping sufficient resources (in the 401K if necessary) of a non-volatile nature (CDs, money market account, etc) to protect against a simultaneous need for cash and a downturn in the stock market. Our 2008 downturn was a doozy, but the S&P 500 had returned to its previous value in about 5 years (with dividends reinvested--a little longer if we factor in inflation ). So, a person who got a surprise termination and no new job would have needed about 5 years of spending in a CD ladder to avoid raiding their stocks when they were down. That's a chunk of change, but for someone within a few years of expected retirement anyway, that cash cushion wouldn't have needed to exceed 25-30% of their total portfolio.

I'm not a financial expert by any means, but when talking about the death of pensions in general, over the last 30 years, pensioners from various companies have been told their pensions are being reduced or even eliminated.

This is a major advantage of 401Ks and IRAs over the old DB pensions. A retiree isn't dependent forever on the continued solvency of their old employer, and they don't suffer the consequences of imprudent actions of those managing the retirement plan (unless it is them).

Australia's plan: Not without problems.
-- Because of the existence of an independent means-tested plan, they have the problem of people deliberately spending down their "superannuation" account and then filing for the backup plan. Our SS doesn't suffer this particular problem, because it isn't means tested--rich or poor, you get the check you were promised. There are other very good practical reasons not to means-test social security, it brings on a whole raft of unintended consequences.
-- We should not say that "the employer pays 15%." That money is coming from the employees, in the form of reduced compensation (the same things happens with US social security--both the "employer half" and the employee half of the taxes). If we went to such as scheme and increased employee and employer payments into a mandatory retirement scheme, take home pay would be reduced by the same amount. Under our present system (with higher take home pay), workers are free to put away money or not. Some people really do have true short-term and long-term obligations that are more important than saving for retirement, and I prefer a system that lets them make that choice. Social security is there to keep them off the streets (and off the dole) if they never do get around to saving any money.

 

[jazz4cash]

25-30% is a huge chunk to keep in cash just in case of a layoff or similar event. This actually happened to us and it was a helpless frustrating situation to have retirement assets that could not be touched without a penalty. I'd like to see a provision to create an exception to the early withdrawal penalty on a portion of the balance in the event of job loss.

 

[NW-Bound]

Australia's plan: Not without problems.
-- Because of the existence of an independent means-tested plan, they have the problem of people deliberately spending down their "superannuation" account and then filing for the backup plan. Our SS doesn't suffer this particular problem, because it isn't means tested--rich or poor, you get the check you were promised. There are other very good practical reasons not to means-test social security, it brings on a whole raft of unintended consequences...

I thought about this the other day, and wonder how bad this problem is in real-life.

Basically, the problem is how we can take care of the unfortunate, also protect the dumb spendthrift people from themselves, while not shackle the people who can take care of themselves. With the death of pensions, and some people saying that the masses cannot or do not want to make use of 401k, the pressure may be to expand SS.

I already do not like SS the way it is, with all the silly rules that favor the older generations, and get tightened down for the younger generations because the money is all spent. My children may have to work to 70 to support older people, and if they manage to save something for themselves, they will be considered rich, and their SS forfeited to be given to people who have the same salary their working life but spend it all. SS is never the worker's money. It's the government money to give out as they see fit. This matter was ruled on long ago in Flemming v. Nestor by the US Supreme Court.

If SS is to be expanded, it will have to have a component like IRA/401k. Else, responsible people still have to save outside of it, while pitching in more than they do now to support the people who can save, but do not want to.

How far do we go in being our brother's keeper?

 

[samclem]

25-30% is a huge chunk to keep in cash just in case of a layoff or similar event. This actually happened to us and it was a helpless frustrating situation to have retirement assets that could not be touched without a penalty. I'd like to see a provision to create an exception to the early withdrawal penalty on a portion of the balance in the event of job loss.

I understand your point, but:
1) We already have a problem that people routinely raid their 401Ks. Being out of work ("between jobs") is not as rare as getting hit by lightning, it's probably something most people should anticipate as a possibility. I don't know if, as a matter of policy, we should make it easier for people to draw down their 401Ks.
2) IMO, the "penalty" is not onerous. It's 10% of the amount withdrawn. Frankly, it's low enough now that it may make good financial sense for many people >not< to have an emergency fund outside of their retirement account. They can choose to roll the dice, and if they don't have an emergency then they saved some money on their taxes.

To some extent, Roth IRAs serve the purpose of providing emergency funds if needed, since contributions can be withdrawn at any time tax-free and without penalty. They are a good option for people who might need cash to carry them through a tough time and who don't want to pay the 10% penalty for withdrawing from their 401K before age 59.5.

 

[samclem]

Basically, the problem is how we can take care of the unfortunate, also protect the dumb spendthrift people from themselves, while not shackle the people who can take care of themselves.

Doesn't SS as we presently have it do a pretty good job of doing this? It provides a baseline income that allows oldsters to survive. People who haven't earned a lot during their working years don't get a huge SS check, but it's a fairly large percentage of what they brought home while working. People who earned a lot get a SS check that is much smaller than what they brought home when working, but it's still enough to live on, and maybe more than many workers earn. Higher earners subsidize low earners, but everyone gets a check. If we went to a means-tested system, the government would need to be far more intrusive to determine who has "means," the SS program would lose a lot of public support, and people close to qualifying for the means-tested benefits would have lots of incentive to the spend down their stash (put the whole wad on red or black--it's a win-win!) or otherwise hide it (give it to the kids as a loan--"pay me back with zero interest over the next 10 years").
If a person wants more than SS will provide, then they will need to save their money. The best way to "unshackle the people who can take care of themselves" is to let them take their d@*n money home and save it/invest it as they see fit. We don't need another program with all the rules, costs, and gaming that comes with it. If people are afraid of the market or want to buy a lifetime income to supplement SS, they can buy annuities--they ain't perfect, but they are more secure than most employer-supplied pensions ever were.

 

[NW-Bound]

Doesn't SS as we presently have it do a pretty good job of doing this? It provides a baseline income that allows oldsters to survive. People who haven't earned a lot during their working years don't get a huge SS check, but it's a fairly large percentage of what they brought home while working. People who earned a lot get a SS check that is much smaller than what they brought home when working, but it's still enough to live on, and maybe more than many workers earn. Higher earners subsidize low earners, but everyone gets a check.

If SS is sufficient, why do we hear about all these complaints about the lack of pensions? There is no minimum to SS, and people who work a combination of low wage and fewer years will get little. I recall seeing on SS.GOV site a statement that if the benefit is less than $1, they will not bother to send out a check.

Currently, people with SS benefit less than SSI can go claim the latter, but that is means-tested, and to a very low level (I do not know that off-hand).

If we went to a means-tested system, the government would need to be far more intrusive to determine who has "means," the SS program would lose a lot of public support, and people close to qualifying for the means-tested benefits would have lots of incentive to the spend down their stash (put the whole wad on red or black--it's a win-win!) or otherwise hide it (give it to the kids as a loan--"pay me back with zero interest over the next 10 years").

I agree that it is a big potential for abuse, similar to abuse of SSI right now, or it can get worse because it is easier to claim with the higher asset level as allowed by the Australian system.

If a person wants more than SS will provide, then they will need to save their money. The best way to "unshackle the people who can take care of themselves" is to let them take their d@*n money home and save it/invest it as they see fit...

That's what we do now. And I have no problem with that. I even retired early, as most people here did. But these soft-hearted people keep saying that the dumb people who do not save need to be forced to save. Or perhaps they want the savers to share?

What the Australians did was in effect privatizating their SS system, and unify the IRA, 401k, 403b, FERS, etc... into a national uniform plan. This, I don't think you have a problem with. The sticky problem is how to take care of the people who do not make enough, and to prevent abuse.

By the way, Chile also privatized its SS, something along the same philosophy of the Australian system, but I know even less details of this.

 

[samclem]

What the Australians did was in effect privatizating their SS system, and unify the IRA, 401k, 403b, FERS, etc... into a national uniform plan. This, I don't think you have a problem with. The sticky problem is how to take care of the people who do not make enough, and to prevent abuse.

I would not have a problem if we made sense of the alphabet soup of tax-favored retirement programs, simplifying them and reducing the complexity.

In the past, I was in favor of allowing greater privatization of SS--individual accounts, etc. I still think this would, in theory, allow more people to retire with more money. Most people reading this board would have significantly more retirement income if they'd been allowed to keep their SS contributions (and those of their employer) and invest the money. But I don't favor it anymore, largely because I and every other person who earns some money or does the responsible thing and saves some money will be asked to bail out those who won't save, or who invest foolishly, or who withdraw all their retirement savings to go on a world cruise, etc. I'm now willing to put up with the collectivism and paternalism of SS as we know it as the least damaging and least expensive way to allow the rest of us to have greater financial freedom. The SS check we get from the government does allow even those who have saved responsibly for retirement to invest slightly more aggressively and get better returns, which is useful.

 

[NW-Bound]

... I and every other person who earns some money or does the responsible thing and saves some money will be asked to bail out those who won't save, or who invest foolishly, or who withdraw all their retirement savings to go on a world cruise, etc. I'm now willing to put up with the collectivism and paternalism of SS as we know it as the least damaging and least expensive way to allow the rest of us to have greater financial freedom...

Is it?

The way the problem has been repeatedly brought up in the media leads me to think that we are expected to do some "bail out" in the future. Maybe not directly, but in the form of higher taxes for people who manage to have additional income besides SS. I don't have a lot of confidence that it will not play out that way. In the past, many posters have said that they expect SS to be means-tested or reduced for themselves in the future.

It bothers the heck out of me when someone with the same salary history as mine gets more money now because I am considered rich and do not need it. Maybe the spendthrifts are the smart ones, and I am too dumb to realize it.

A world cruise looks better all the time. Well, I can also take my money and convert it to Krugerrands and hide it in my backyard to reduce my "means".

 

[ArkTinkerer]

I know someone whose retirement plan is to pay off their mortgage by the time they retire, then sell the house and move to an apartment. They plan to live on the proceeds from the house sale plus the modest amount they will get from CPP and OAS.

I'm surprised more people didn't pick up on this. Given how many live in HCOL areas with home prices that traditionally have gained value it is not a bad strategy. Especially if one is willing to take the gains and move to a lower cost of living area. Can it be somewhat risky? Yes. But it also allows for easy access to the gains before traditional retirement age.

 

[Teacher Terry]

Californian's have been doing this for years by moving to NV, Oregon, Washington, etc. They sell a small home for a million and move here and buy a nice one for 300k and keep the rest.

 

[jazz4cash]

The &quot;Retirement Crisis&quot; is worse than we thought

I understand your point, but:
1) We already have a problem that people routinely raid their 401Ks. Being out of work ("between jobs") is not as rare as getting hit by lightning, it's probably something most people should anticipate as a possibility. I don't know if, as a matter of policy, we should make it easier for people to draw down their 401Ks.
2) IMO, the "penalty" is not onerous. It's 10% of the amount withdrawn. Frankly, it's low enough now that it may make good financial sense for many people >not< to have an emergency fund outside of their retirement account. They can choose to roll the dice, and if they don't have an emergency then they saved some money on their taxes.

To some extent, Roth IRAs serve the purpose of providing emergency funds if needed, since contributions can be withdrawn at any time tax-free and without penalty. They are a good option for people who might need cash to carry them through a tough time and who don't want to pay the 10% penalty for withdrawing from their 401K before age 59.5.

Those are good points.
It seems odd that you could get an exception to the 10% penalty to buy a house, but if you need the funds because you lost your job you're stuck. I believe financial hardship gets you access to your funds but you're still hit with the penalty. That may inhibit some folks from contributing more to the plan. Likewise the loan provision gave me confidence to put more in.

 

[Ed B]

I blame it on the US being so much smaller then.
Surely one Texas Ranger could have done the trick, if we had only had one.

One riot, one Ranger. But they were "police", judge and executioner back in their hey-day.

 

[Sunset]

I am not suggesting that at all. All I am saying is that when we label every good fortune in our life as some sort of happy accident, we are short changing ourselves. You were born in an "affluent" nation because your parents chose that....not "luck"...luck isn't deliberate. Circumstances do play a huge part. But it's more fortunate than luck. We didn't inherit the state we are in now, unless you are a trust fund baby, and even that is deliberate. Someone meant for you to have it.
I am not lucky that I am just the financhal position I am in. I am fortunate that several generations ago, my descendants made the choice you come here to start a family and make a better life for their children. That's not luck. I sag my ass out of bed even when I don't want you to come to work. That's not luck. I sacrifice now, putting money into investments instead of taking vacations.
I guess it comes down to workday view. Yes, much of the rest of the world is poor compared to us. That doesn't make us lucky. That makes us fortunate.
You can choose to call it luck if you like, but what does that say about all the decisions that were made to get you to this point?
maybe this is six of one, half dozen of another..

+1
Also, we are generally comparing ourselves to others around us and in the USA or other 1st world country, and very many of them had the same luck opportunities.

Otherwise I have to thank my lucky stars my parents had sex that night or I would not be me, and my mother didn't have an abortion since she was single. But that would be ignoring my ancestors, and how lucky I am a Cromag man didn't kill off my genetic line, or that the Black Plague missed my important ancestor etc . etc. etc.

I am thankful for all the luck, but I could be a street bum if I had not put in a lot of consistent careful hard work and effort, I didn't win a lottery to be here.

 

[JohnnyBGoode]

I really like the introduction of "fortunate" into the discussion. It helps provide a bit of nuance that is lost between "luck"/"lucky" and "hard work". Heck, we are all fortunate to be born in the 20th century and not the 12th century, but that doesn't mean it is easy or a free ride.

 

[cubicleshark]

My point exactly.

 

[2017ish]

I really like the introduction of "fortunate" into the discussion. It helps provide a bit of nuance that is lost between "luck"/"lucky" and "hard work". Heck, we are all fortunate to be born in the 20th century and not the 12th century, but that doesn't mean it is easy or a free ride.

for·tu·nate
ˈfôrCH(ə)nət/
adjective
favored by or involving good luck or fortune; lucky.
"she'd been fortunate to escape more serious injury"
synonyms: lucky, favored, blessed, ...

 

[GTFan]

LOL, yeah that was an easy zinger there.

 

[KarenC]

for·tu·nate

ˈfôrCH(ə)nət/

adjective

favored by or involving good luck or fortune; lucky.

"she'd been fortunate to escape more serious injury"

synonyms:lucky, favored, blessed, ...

con·no·ta·tion\ˌkä-nə-ˈtā-shən\
noun
: an idea or quality that a word makes you think about in addition to its meaning
Full Definition
1 a : the suggesting of a meaning by a word apart from the thing it explicitly names or describes
b : something suggested by a word or thing : implication

 

[2017ish]

con·no·ta·tion\ˌkä-nə-ˈtā-shən\
noun
: an idea or quality that a word makes you think about in addition to its meaning
Full Definition
1 a : the suggesting of a meaning by a word apart from the thing it explicitly names or describes
b : something suggested by a word or thing : implication

Is there a connotative difference between fortunate and lucky? (Not being snarky--I have always viewed them as equivalent in drafting; maybe I've been missing something?)

 

[ER Eddie]

Is there a connotative difference between fortunate and lucky? (Not being snarky--I have always viewed them as equivalent in drafting; maybe I've been missing something?)

I think there is. For instance, I can say, "I am really fortunate to be in a position where I have a job I like and also to be able to retire completely, if I want to." I wouldn't use "lucky" in that sentence, though, because "lucky" implies no individual effort was involved in producing the outcome. I know my efforts and choices were part of what created that "fortunate position." I also know that many other things contributed, such as the kindness/wisdom of others, being born when and where I was, spiritual assistance, etc.

I think "fortunate" sometimes expresses gratitude and appreciation for the circumstance but downplays any personal contribution (perhaps out of humility or gratitude), even when credit for individual choices/effort is due. "Lucky" implies no individual credit/responsibility for the outcome at all.

 

[karen1972]

knowing many people who fall into the "not contributing", I find it falls into one of a few categories

1. Why save, I'm going to die anyway (often not in great health, high risky behavior, and usually a heavy smoker.)
2. Why save, I'll just lose all my money anyway. So this would be those that are constantly being ripped off or know people who have been ripped off. And if you look at loaded funds and fees that some of these people pay, they would be better putting their money in a mattress.
3. I have insurance and I have SS, that was good enough for my parents, good enough for me. These people have no idea how to invest, its all foreign language and their circle doesn't know any more than them. Their money is likely in a traditional savings account, maybe a CD, they are working on paying off the house, and know they will have to live on a budget or govt assisantance at some point.
4. Those that just like to spend money and don't care. There are plenty that have no problem running up their credit card.. you are so busy keeping up with the Jones that you don't have time to think about what the future will be.. you assume it will just work itself out. Maybe they assume they will inherit from parents (know many of THESE type of people).

You can't talk them out of it. One of brother-in-laws cousins posted, quit my job, cashed in my 401k, going to start over again, moving to North Carolina... that lasted oh about 8 month when that little money they had saved ran out...and now they are back to work, starting over from zero, but I doubt they are saving again.

 

[LOL!]

The wealth disparity will probably just get worse. I'm thinking that in the old days, pensions did not pass on to children, but in the new days, all that 401(k)/403(b) and IRA money ($15 Trillion) is enough for some of it to go to heirs when the owners die. OTOH, that will also mean that future generations probably won't need to save as much for their retirements either.

 

[doneat54]

I wonder how many people don't save for retirement because what they make barely covers their living expenses.

I would prefer to think that "many people don't save for retirement because their chosen lifestyles consume all of what they make."