Thursday, September 20, 2018

America's Retirement Nightmare?

Ted Knutson of Forbes reports, Retirement Is In Peril For Most Working Class Americans, Warns New Report:
Retirement is in peril for most working-class Americans cautions a new report by the National Institute on Retirement Security, a Washington think tank.

“The American dream of a modest retirement after a lifetime of work now is a middle-class nightmare,” warns the study’s author, NIRS Executive Director Diane Oakley.

The report contends nearly four out of five working Americans are falling short of conservative retirement savings targets.

Roughly the same number have less than one year’s income saved in retirement accounts, according to the study.

That “less than one year” is actually nothing for close to three out of five workers.

“57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension,” the think tank emphasizes.

Oakley says causes of the retirement savings shortfalls include fewer workers having stable and secure pensions and the replacement of workplace pensions with 401(k)-style defined contribution accounts which provide less savings and protection.

The report claims total retirement savings are still suffering from aftershocks of the Recession.

“The economic downturn triggered a decline in total contributions to defined contribution retirement accounts as many employers stopped matching employee contributions for a time pushing total contributions below 2008 levels,” the report explains.

In the alert, NIRS says while the typical American needs 85 percent of their working income to maintain their standard of living in retirement, Social Security provides only 35 percent.

“This leaves a retirement income gap equal to 50 percent of pre-retirement earnings that must be filled through other means,” the study points out.

To help fill the retirement savings gap, the retirement security think tank says Social Security should be strengthened and access should be expanded to low-cost, high-quality defined contribution plans, defined benefit pensions and hybrid plans.

To expand access to pensions, the group is urging Congress to lure more employers into offering them by making required contributions more predictable.

In another federal measure that could help reduce the savings gap, NIRS says tax credits should be improved to help low and moderate income workers save for retirement.

To see the full study, click here.
Robert Steyer of Pensions & Investments also reports, Majority of working-age Americans have no retirement savings – NIRS report:
The median retirement account balance among working-age Americans is zero, according to a research report by the National Institute on Retirement Security, a non-profit research group based in Washington.

Using U.S. Census Bureau data, the institute also found 57% of working-age Americans — more than 100 million people — don't have retirement assets in an employer-sponsored defined contribution plan, pension plan or individual retirement account.

"Retirement is in peril for most working-class Americans," Diane Oakley, the report's author and NIRS executive director, said in a news release Monday.

The report found about 80% of working Americans have less than one year's income saved in retirement accounts. "Also, 77% of Americans fall short of conservative retirement savings targets for their age based on working until age 67, even after counting an individual's entire net worth — a generous measure of retirement savings," the news release said.

The NIRS report noted that even among retirement account savers, the typical worker had a balance of just $40,000.

"This is far off track from the savings levels Americans need if they hope to sustain their standard of living in retirement," Ms. Oakley said.

The report added 68% of individuals ages 55 to 64 have retirement savings "equal to less than one time their annual income, which is far below what they will need to maintain their standard of living over their expected years in retirement."
Take the time to read this report which is available here.

This is nothing new to me, I've long sounded the alarm on America's broken retirement system and it is a recurring theme I keep coming back to.

Why is it a recurring theme? Because it's a looming catastrophe and millions of people will succumb to pension poverty, negatively impacting the economy over the long run.

Worse still, there are no serious policy proposals being put forth to address this looming crisis.

President Trump recently signed an executive order to make it easier for small employers to offer 401(k)s through multiple-employer plans and to review the rules on required minimum distributions (RMDs) but that isn't enough, nor will it stop the freight train coming our way.

There are millions of Americans with little to no savings for retirement who will end up in pension poverty. It's a national epidemic but nobody is really talking about it.

This shouldn't surprise us. Over 24 million Americans are using their home equity "to get by" and saving for retirement isn't a priority when people are barely able to make ends meet (or spending frivolously on things they don't need).

Welcome to the new economy which is more of the same old economy except rising inequality is getting worse and will also impact growth over the long run in a negative way.

By the way, things aren't that much better in Canada where policymakers are looking at simple solutions for curing retirement anxiety:
Ottawa could radically simplify Canadian retirement planning with a few simple, low-cost changes to the tax code. The potential winners would include everyone who worries about running out of money in their old age.

All that is required, according to a new C.D. Howe Institute report, is minor tinkering with existing tax regulations. The changes would open the door to “longevity insurance” – a financial product that would buffer people against the high cost of living to 90 or beyond.

The financial challenge of funding exceptionally long retirements has become more imposing as guaranteed pensions have become rarer and lifespans expand. "The single thing that retirees without a defined-benefit pension plan worry about the most is the possibility they will run out of money before they run out of life,” said Don Ezra, author of the report, in a phone interview. “They have no idea how to cope with that problem.”

Many retirees address the issue by building buffers of excess capital. They save more than they need, spend less than they could and leave a pot of money behind. But that forces them to endure a more spartan retirement than they could actually afford in retrospect.

What’s needed, but what isn’t now available, is a product that could allow a 65-year-old to purchase a guaranteed-for-life stream of income that doesn’t actually begin for another, say, 20 years. In one stroke, this longevity insurance would convert the great unknown of retirement planning – how long must I make my money last? – into a known quantity.

A person who was able to purchase longevity insurance could feel free, in an extreme case, to spend every penny in their portfolio between the ages of 65 and 85. The buyer would know that at the age of 85, their longevity insurance would start paying them a regular income, and that income would last for the rest of their lives.

In many ways, this ideal product would resemble the annuities now on the market, but with one key difference: The annuity products that currently exist start paying out money immediately, but longevity insurance wouldn’t start paying out until a couple of decades in the future.
I will let you read the rest of the article here but I'm highly skeptical  because in order to be eligible for longevity insurance, you need to reach a certain age with the retirement savings you have and for most people, they don't have enough to reach that age.

I'm also highly skeptical of annuities (I agree with Ken Fisher, you should stay away from them) and think there are better ways to help Canadians like allowing them to contribute more to their CPP even after the age of 65.

The one thing Canada has gotten right is the recent enhancement of the CPP where assets are being managed properly by the CPPIB.

Americans need to adopt the same model for their Social Security, have assets managed at arms-length from government and make sure it is solvent for generations to come.

Below, an interesting discussion I heard earlier today on CNBC. Former NFL running back and Hall-of-Famer Eric Dickerson said that he wrote a letter to NFL officials fighting for health benefits and a yearly salary for retired NFL players.

As you can see, America's retirement nightmare doesn't just hit ordinary Americans, even former professional football players are fighting for their health and retirement benefits into their golden years.

I used to play football in high school, it's brutal on the body and these guys deserve a lot better health and pension benefits when they retire from the sport.

Also notice how Eric Dickerson laughs when asked about the NFL pension and what he says about younger players who only think about playing footbal and not thinking about their future when they turn 65. He's absolutely right, young players should heed his wise advice.

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