Saturday, May 10, 2014

Will You Have Enough Money To Retire?

In honor of Financial Literacy Month, I selected Helaine Olen’s book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry for The Savvy Reader Book Club’s April/May selection. Today’s post is the first in a series of posts I will be writing based on the book.

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*


  1. As long as I keep contributing to my employer-matched 401K I should have enough to retire. My interest earnings rate is good and they match my contributions (essentially a doubling of my money right there). I also started saving for retirement very early, age 19.

  2. Yes, a market correction will mean I will need to work longer, probably right up to 65. I'm hoping to retire from full-time work at 60ish.

    Do you find that the retirement funds recommend higher savings in your portfolio than what you think you reasonably need to live on? I mean major differences, like half a million more than what I was planning, if you use their on-line tools.

    I also think they estimate too high rates of growth, even though I am mostly in equities.

  3. I never put social security in my retirement estimates. I agree that it will probably be gone or reduced. Also, because of all our debt, my generation is putting off things like getting married and having children, which means a smaller pool to even fund the social security in the future. We can't even keep up with the boomers needs now.

    I'm also lucky to work for a company that offers a pension, but I need to stay for at least 5 years, which I know I'm going to have trouble doing. Hopefully I actually settle in here ok and 5 years just shoot by.

  4. Being self employed, I have a sep-IRA and sometimes I think, I need to add more money monthly to it. I will take a look at the book, thanks for the information.

  5. I need to save more aggressively. It's hard with him in school and me just starting my career, but I know we'll look back at these years and say, "Why didn't we save more?"

    Being from Pittsburgh, I know oh-so-many people who really got screwed on the pension thing. Paid into it their whole lives and then the steel mills shut down, taking all the money for their retirement with them. Now a lot of people who did save are living off of purely social security.

    So I'm wary of pensions. I contribute to mine. But diversifying through the market, even though it may at times be volatile, gives me some peace of mind.

  6. Shoeaholicnomore,
    Saving for retirement at age 19 - you must have had wonderful role models. Wishing you much success.

  7. I'm not counting on anything but my own investments to get me through retirement. I started contributing to a ROTH at 24 years old, but I'd love to diversify my investments.

  8. Debt Debs,
    I would love to retire from my current job and do something else someday. A second career that I could work on in my 60's.
    I think the retirement calculators calculate higher spending projections in my retirement than I will really need. I've always lived a pretty simple life. The biggest unknown is medical expenses.
    I absolutely think they use too high rates of growth.

  9. We live in Canada, so a few things are different, but the general principle is indeed the same! We need to be smart with our cash flow. use wisdom more & more...
    Thanks for sharing on "Small Victories Sundays"; Rachael @

  10. Sheila,
    You are welcome. Happy to learn you are investing in a sep-IRA.

  11. Femme,
    When I was working full-time and in school which included paying tuition I invested only the minimum amount that allowed me to receive the 401(k) company match. When the match was suspended I stopped contributing altogether, but I now have 50k saved that I wouldn't have if I had done nothing.

    Yeah - those who lost their pensions really got screwed. It is scandalous and an eye-opener that we really have to take watch out for ourselves. I have a co-worker who used to work for a major corporation. His pension money was transferred to a 401(k) when 401(k) accounts became a thing. I don't understand the whole thing, but he still talks about how he got screwed. I imagine it was because he went from a guaranteed amount to his own money - most of which he withdrew to pay for his son's education. BTW - the major corporation outsourced his job and laid him off.

  12. This is something I worry about as I get closer to that R-Day. The day I retire. Seems far off, but at my age, it's creeping up and will be here before I know it. I feel bad that we Baby Boomers are depleting the Social Security funds, and that pensions are disappearing. I do feel lucky that I am a state employee and that I will have a pension. But who knows how much? Guess I better start figuring this out and fast.

  13. I fear we won't have enough but our retirement guys tell us we are doing pretty well for people our age. I don't buy it but I am conservative and won't be counting on social security either. Thanks for sharing with #SmallVictoriesSunday #linky, hope you link up again tonight!

  14. i hope so! i really don't know until i get there. i agree that the calculators model in excessively high expenses. i'm pretty lean like you. we recently bought a duplex in san francisco where rents are astronomically high. our fall-back is to rent out the 2 units and live off of the rental income.