Ignorance in accumulation phase "compounded" in decumulation phase

[nun]

So we've seen the havoc wrought by forcing financial novices to save for their retirement in 401ks. The don't save enough, when they do they make uninformed investment decisions, they sell at 7000 when the stock market plummets and then decide to get back in at 12000 after waiting on the side lines for a couple of years. I'm probably being a bit too cynical, but it's more true than not.

However, things are just going to get worse as these financial novices retire. Up to now they've had a salary coming in so poor investment returns haven't been an issue and continued contributions have helped to keep the accounts from looking like complete failures. But now the true test comes.....retirement and disbursement. This is far more difficult to manage as AA, withdrawal rate, account organization for cash flow and tax planning all conspire to confuse the retiree. I can well imagine these accounts being quickly spent due to a combination of poor budgeting and expense control and bad investment decisions. Are you as pessimistic as I am.

 

[rescueme]

Are you as pessimistic as I am.

No, not at all.

While I (and DW) can't "save the world" in this matter, we can take care of ourselves.

I retired without a DB (pension); DW will with two small one's, only paying a few hundred dollars for the remainder of her life only.

DB plans went out the window when we were in our mid-30's and we've "been on our own" since that time via 401(k) and T/Roth IRA's, and have accumulated a nice retirement "stash", IMHO. We've also given great thought and incorporated a (at least I think) a solid disbursement plan for retirment, which we've "test driven" for a bit over four years, since I retired (and that's without a pension, nor SS for me during that time).

We're not unusual. You will find folks when faced with the challange to live a LBYM lifestyle, and financially prepare for the future (I believe a lot of them post on this forum ).

Remember, what you "read" (especially today) is the bad/negative things in the world. Very few times will you see a headline on the front page which says "HEY! WE'RE DOING OK"

There's little money in spreading the "good word" these days. Don't believe me, just look to the comments made by folks to any posted news article. What you see is the negative side of life. That sells news articles, both in print and online, IMHO.

 

[Ronnieboy]

I think I am more worried about the people who don't save a thing, expecting to live off SS (and maybe they can?!?) or expect some other government program to [-]support[/-] help them.
At least in the above example the people you are talking about at least saved or tried to save for their retirement. So they would have some inkling that they are responsible for their own well being.

 

[Gumby]

I can well imagine these accounts being quickly spent due to a combination of poor budgeting and expense control and bad investment decisions.

Which is precisely why "privatizing" social security is such a bad idea.

 

[megacorp-firee]

No, not at all.
....

what rescueme said

 

[nun]

We're not unusual. You will find folks when faced with the challange to live a LBYM lifestyle, and financially prepare for the future (I believe a lot of them post on this forum ).

Remember, what you "read" (especially today) is the bad/negative things in the world. Very few times will you see a headline on the front page which says "HEY! WE'RE DOING OK"

There's little money in spreading the "good word" these days. Don't believe me, just look to the comments made by folks to any posted news article. What you see is the negative side of life. That sells news articles, both in print and online, IMHO.

I wish I could be as optimistic as you. Unfortunately polls about the unpreparedness of people for retirement and my personal experience of my friends lack of planning and financial knowledge won't let me agree with you, much as I want to.

 

[W2R]

Which is precisely why "privatizing" social security is such a bad idea.

+1 It is beyond me why anyone would consider that everyone could easily develop the kind of personal finance and money management capabilities that we on this board take for granted. And yet without SS, those who do not have these capabilities are likely to end up penniless, helpless, homeless, and starving in their old age. We wouldn't treat a dog like that.

 

[LOL!]

Somehow, someway, folks have been retiring for decades without any money or savings and doing just fine. I expect that trend to continue.

Many of the elderly I know can survive on social security alone. They didn't retire early and they may still work part-time as clerks, cashiers, and toll booth attendants. But so what?

 

[samclem]

And yet without SS, those who do not have these capabilities are likely to end up penniless, helpless, homeless, and starving in their old age. We wouldn't treat a dog like that.

Well, the "how we treat a dog" reference puts the dog, rightfully, in a passive role. I'm uncomfortable with that characterization of people in this case.

But, I support the current SS scheme for the reasons you cite. Despite the fact that most folks could do better with an individual account, in the real world most people won't. Since those who behaved responsibly will be forced to bail the others out, it's cheaper just to put up with the regrettable wealth redistribution as the least bad alternative.

To the OP's point: Yes, I'm worried. OTOH, it's easy to put off saving until tomorrow and maximize gratification immediately. Once a person quits working and is staring at a fixed banking account balance, I gotta think it will capture their attention.

 

[arebelspy]

I wish I could be as optimistic as you. Unfortunately polls about the unpreparedness of people for retirement and my personal experience of my friends lack of planning and financial knowledge won't let me agree with you, much as I want to.

Agreed.

Most people will need to be bailed out by those who planned.

 

[nun]

Somehow, someway, folks have been retiring for decades without any money or savings and doing just fine. I expect that trend to continue.

Many of the elderly I know can survive on social security alone. They didn't retire early and they may still work part-time as clerks, cashiers, and toll booth attendants. But so what?

Sure, people will cope, but if they work part time they aren't really retired. However, my point isn't so much about SS or coping, it's about how unprepared people with 401ks are to go from the accumulation phase to the income phase. The balances of 401k accounts are generally insufficient to provide a retiree's income and I believe that poor management will see the balances quickly dwindle once withdrawals start. SS and part time work will become increasingly important. I also expect there to be a big push to sell these people dubious annuity products and we'll see problems similar to the subprime mortgage fiasco.

 

[Mulligan]

I have read in finance articles that the "average" person spends more time planning their vacations, than planning their retirement. That being said it does not surprise me that many do not have any more money to retire on. Many of these people say they will just work until they die, however that relies on three variables all beyond their control. 1) Will health allow it? 2) Will someone hire them? 3) Will salary be sufficient?

 

[GregLee]

I also expect there to be a big push to sell these people dubious annuity products ...

Of course. I'd like the SS system to be extended by allowing people to increase their SS benefits by paying extra into the system, perhaps by rolling their 401k accounts into SS. It would provide a straightforward way for people to avoid being cheated by insurance companies, and by infusing some cash, it could delay the day when the SS system runs into fiscal problems.

 

[WilliamG]

Of course. I'd like the SS system to be extended by allowing people to increase their SS benefits by paying extra into the system, perhaps by rolling their 401k accounts into SS. It would provide a straightforward way for people to avoid being cheated by insurance companies, and by infusing some cash, it could delay the day when the SS system runs into fiscal problems.

Good idea.

 

[glippy]

Somehow, someway, folks have been retiring for decades without any money or savings and doing just fine. I expect that trend to continue.

Many of the elderly I know can survive on social security alone. They didn't retire early and they may still work part-time as clerks, cashiers, and toll booth attendants. But so what?

Sure, but in the decades past people had pensions.

And before that they had a big family all living in one house to take care of them.

Now they have wal-mart.

 

[73ss454]

Good idea.

Really, I don't think so. That money will go onto the General fund like our SS money for the government to spend it as they see fit. The last thing I'll ever do is give them more of my money if I can avoid it.

 

[Nords]

So we've seen the havoc wrought by forcing financial novices to save for their retirement in 401ks.
But now the true test comes.....retirement and disbursement.
I can well imagine these accounts being quickly spent due to a combination of poor budgeting and expense control and bad investment decisions. Are you as pessimistic as I am.

Sure, people will cope, but if they work part time they aren't really retired. However, my point isn't so much about SS or coping, it's about how unprepared people with 401ks are to go from the accumulation phase to the income phase.

We posters on this board spend more time debating what color car we want than the actual critical features we should be shopping for. I don't see much ethical maneuvering room to critique the retirement plans of those who may already know what color of car they want.

Retirement and disbursement is deceptively simple. People will work until they die or can no longer work. If they're lucky enough to choose the "no longer work" option then they'll retire to start spending their money as seems best to them. When they run out then they'll spend whatever money they can get their hands on.

If that's what they plan to do then they don't need to prepare. Heck, they don't even need a plan. They just need to be ready to suffer a lot. I guess you don't need to plan for that either... just take it as it comes.

I think that enough people will end up that way to continue to require a safety net. Some of them are not capable of planning/preparing (for whatever reason) while others choose not to plan/prepare (for whatever reason).

However I think most people will choose to plan/prepare and will lead quiet lives of retirement "muddle along", which they will be able to handle, and which will attract absolutely no attention from the media.

So both the "unprepared" and the "muddle along" categories are taken care of, and there's not much left for us to do but to continue to pay our taxes. I'll let the "work until they die" folks save Social Security & Medicare.

 

[traineeinvestor]

Really, I don't think so. That money will go onto the General fund like our SS money for the government to spend it as they see's fit. The last thing I'll ever do is give them more of my money if I can avoid it.

+1

You'll also be vulnerable to the rules being changed to delay eligibility further to keep SS afloat as the population ages.

 

[Independent]

... I can well imagine these accounts being quickly spent due to a combination of poor budgeting and expense control and bad investment decisions. Are you as pessimistic as I am.

I think you're saying that people used to have SS plus a DB pension and they could just spend their monthly checks.
Now, even those who were prudent and saved will have SS plus a 401k, and they have no idea how to convert those assets into monthly income.

I think there will be a lot of inefficiencies. People will pay financial advisers 200 basis points to do stuff that they could have done by themselves (with a little help from the experts here ). Some will just roll the money into CDs. Some will be too conservative, others to liberal, with withdrawals. Some will run out an be left with just SS.

But, in the DB pension days, a lot of people got burned by inflation that they didn't plan for and ended up in much worse shape than expected. So that wasn't a sure thing either.

I'm thinking most will avoid the poor house because they will adjust spending when they see the balance going down - it usually takes years and people will have time to figure that much out. But, people like us will still be frustrated that they weren't more efficient.

 

[eytonxav]

Of course. I'd like the SS system to be extended by allowing people to increase their SS benefits by paying extra into the system, perhaps by rolling their 401k accounts into SS. It would provide a straightforward way for people to avoid being cheated by insurance companies, and by infusing some cash, it could delay the day when the SS system runs into fiscal problems.

Interesting idea, but do you think the gov't would be a good steward of those funds and that you could count on getting back it back via increased monthly payments?

 

[GregLee]

Interesting idea, but do you think the gov't would be a good steward of those funds and that you could count on getting back it back via increased monthly payments?

Yes, I think obligations of the US government are at least as safe as other securities. But if it gets to the point that not all obligations can be met, there will be a lot of retirees with a lot of votes, to make sure that SS obligations are near the front of the line.

 

[nun]

I think you're saying that people used to have SS plus a DB pension and they could just spend their monthly checks.
Now, even those who were prudent and saved will have SS plus a 401k, and they have no idea how to convert those assets into monthly income.

I think there will be a lot of inefficiencies. People will pay financial advisers 200 basis points to do stuff that they could have done by themselves (with a little help from the experts here ). Some will just roll the money into CDs. Some will be too conservative, others to liberal, with withdrawals. Some will run out an be left with just SS.

But, in the DB pension days, a lot of people got burned by inflation that they didn't plan for and ended up in much worse shape than expected. So that wasn't a sure thing either.

I'm thinking most will avoid the poor house because they will adjust spending when they see the balance going down - it usually takes years and people will have time to figure that much out. But, people like us will still be frustrated that they weren't more efficient.

I just wanted to point out the general lack of financial knowledge and its potential consequences. Even the prudent ones haven't saved enough and have generally made bad decisions. The folks on this forum are right at the tail end of the bell curve as we enjoy talking about this stuff and have 401k/IRA balances 5 or 10 times that of the average retire and can come up with multiple approaches to fund a 4% SWR, and might actually succeed.

Arguments can be made for both DC and DB approaches, but I'm staggered by how little people understand about their finances which leaves them ill prepared to manage their DC plans or evaluate the advice of a financial planner. This is one of the most important aspects of life, yet many are afraid of it and prefer to ignore the issues or pay 2% a year to have someone with CFP after their name do some generic planning. The consequences of this ignorance have been highlighted by the recent down turn and once withdrawals start it will surely get worse. Remember the 401k generation is just starting to retire. It will be interesting (or maybe that should be frightening) to see how the baby boomers manage their money in the income phase.

 

[Gone4Good]

It would provide a straightforward way for people to avoid being cheated by insurance companies

And increase the likelihood of being 'cheated' by the government.

I put 'cheated' in quotes, because that isn't really the right word. But what you have with SS and Medicare is an unenforceable promise to receive certain benefits. The government can change that promise at it's sole discretion. It has in the past, and almost certainly will again in the near future.

I wouldn't swap a fixed pile of cash for any government benefit unless it had the power of an enforceable contract behind it.

 

[Gone4Good]

I just wanted to point out the general lack of financial knowledge and its potential consequences.

I think the consequences are: 1) People working far longer than they ever expected 2) People leaning heavily on family for support 3) People drastically cutting their expenditures to manage with the meager SS benefits they'll get

We're seeing this already. I know I am.

 

[Texas Proud]

I wish I could be as optimistic as you. Unfortunately polls about the unpreparedness of people for retirement and my personal experience of my friends lack of planning and financial knowledge won't let me agree with you, much as I want to.

As some people say "you can't fix stupid".....


I have an aunt (that I have only seen one in my life) who went through her whole life's savings and the insurance money she got when her husband died in less than three years... seems that she had all of her money in a bank checking account and just wrote checks... never thought about it at all until the account got to zero (I think she had over $300K to begin)...

So, I do share some of your concern... but look at my first sentence and let me know what can be done about it...