In Pound Foolish, Helaine Olen writes:
Countless studies have been conducted about Americans and retirement post-2008, but they all say the same thing: we’re petrified and getting more scared by the day. “If we find a consensus about anything in America, this is it,” said pollster Bill McInturff, whose 2011 annual National Voter Survey found almost nine out of ten people worried they did not have enough money set aside. The folks who administer the United States’ corporate retirement plans feel similarly. When Deloitte and the International Society of Certified Employee Benefit Specialists surveyed plan sponsors, they found a mere 15 percent of those queried believed the employees their plans were supposed to be serving were saving enough money for their golden years. (Pgs. 75-76)Why are we so scared?
The guaranteed pension is becoming extinct:
In the early 1980’s, 62 percent of workers had a pension plan, a guaranteed stipend paid by an employer to an employee when they retired; by 2007 the same number only had access to a 401(k) or similar employee-not employer-based savings plan, where one is expected to put their own money aside to pay for retirement.Here are the problems with this new 401(k) retirement model:
No guaranteed stipends:
During retirement, my father-in-law had a pension and retirement health benefits in addition to his social security and Medicare benefits. He was content. He didn't travel or live extravagantly, but he did have enough money to give his grandchildren expensive gifts from time to time. When I think of my own retirement I know I won't have that luxury. The luxury of knowing exactly how much money I will have coming in every month. I don’t have a pension, just 401(k) savings and a few other after-tax investments. If a large unknown expense occurs or the market is hit with another huge correction my portfolio could be decimated leaving me without enough money to withdraw an adequate monthly stipend.
Is social security guaranteed?
I also think people, especially those who are under the age of 50, are worried the social security fund will run out of money and either the benefit won’t be available for them or it will be reduced.
We have to be our own investment manager:
I remember the first time I had to allocate my 401(k) contributions. I put 25% into each of the four funds offered. Later, I would put 100% into the fund that performed the best in the previous quarter. Currently, my financial planner selects the funds and provides the allocation for my 401(k) account.
Not all employees have a financial advisor:
In the past, my company’s 401(k) administrator would advise employees to direct their money into a target based fund when they were unsure how to allocate their contributions. After he learned these funds were not the panacea they were marketed to be he stopped giving advice altogether. He is now interviewing 401(k) administration companies that offer financial planning services. My own financial planner recommends he proceed with caution. It has been his experience that these companies show up for an initial consultation then you never see them again, but your plan still pays the fees.
Retirement calculators don’t account for stock market corrections:
How much will your portfolio actually grow? Many financial planners, including my own, provide retirement worksheet projections indicating huge portfolio gains. My planner uses an earnings assumption of 8.42% and an inflation rate of 3%. Under closer examination I see the 8.42% is a blended rate ranging from cash and equivalents return of 4% to a special sector funds return of 12%.
When I left my last place of employment in 1998 my 401(k) account had a balance of $29,000. Fast forward 16 years and it now has a balance of 55,392.75. That isn't exactly an earnings rate of 12% (the standard rate used in most retirement calculators) or even 9.75% (the average annual return for the S&P from 1927 to 2011). I calculate the return to be less than 5%. In case you are curious it is currently invested in Thornburg Limited Term Income Class C and Washington Mutual Investors Fund. When I complained to my financial planner about my measly return he reminds me this is just one piece of my entire portfolio which is diversified in totality.
No access to 401(k) plans:
As the popularity of contract workers continues to grow, I am concerned in future years retirees will have even less money saved for their retirement.
Will I have enough money to retire?
As I told my financial planner, I can't afford another major market correction. If my portfolio can achieve an 8.42% return and if I don't incur an unexpected hardship I should have enough money, if things don't go as planned...I have no idea what I will do.
What about you, will you have enough money to retire?
*Part of Financially Savvy Saturdays on Femme Frugality and Debt Debs*