Retirement crisis: real or imagined?
Are American workers going to be financially ready to retire? Two recent articles posed different answers to this question. A 
recent article by Mark Gimein for the Washington Post website The Big Money suggests the trendy Chicken Little theory that the sky is falling. According to this viewpoint, Americans are doomed because 401(k) plans have been a failure. Gimein cites the common complaint that Americans save too little and invest poorly. Instead, he prefers that large corporations take on investment and longevity risk of workers through the rebirth of the traditional pension plans. The nonpartisan Employee Benefit Research Institute (EBRI) reported that the number of single-employer defined benefit pension plans declined 75% over the last 20 years.
I have news for Mr. Gimein – the return of traditional defined benefit plans sponsored by corporations is not likely to happen for a variety of reasons. Instead, the era of workers being responsible for their own retirement financial well-being through 401(k) and 403(b) plans and IRAs is here for awhile. Working for a private employer or a state or city or union that sponsors a traditional defined benefit retirement plan, will continue to be increasingly rare.
Another view of the retirement savings dilemma is posed by Peter J. Brady, who penned a white paper for the
Pension Research Council at the University of Pennsylvania Wharton Business School. His paper was published in December 2008 and opens with the following synopsis:
“Despite only having been in existence for 27 years – less than a typical working career – some analysts seem to have concluded that 401(k) plans are a failure. For example, some argue that the 401(k) is “coming up short” due to, among other factors, low contribution rates among those participating. A recent government report concludes that “low defined contribution plan savings may pose challenges to retirement security.” In addition, there are proposals to replace 401(k) plans with Guaranteed Retirement Accounts, in part due to belief that 401(k) plan participants will not be adequately prepared for retirement. This paper illustrates that moderate 401(k) contribution rates can lead to adequate income replacement rates in retirement for many workers; that adequate asset accumulation can be achieved using only a 401(k) plan; and that these results do not rely on earning an investment premium on risky assets.
In his conclusion, Mr. Brady writes, “…for most workers, moderate 401(k) contribution rates can lead to adequate income replacement rates in retirement, and this result does not rely on earning an investment premium on risky assets.”
Mr. Brady’s argument requires assumptions about when an individual retires, the rate of return earned on savings, and the generosity of future Social Security benefits. According to Mr. Brady, he used reasonable and defensible assumptions. One of the key assumptions by Mr. Brady was the moderate contribution rate necessary to adequately fund a 401(k) plans. His conclusion is that a total contribution rate of 6% to 10% of earnings (depending on earnings and lifestyle), along with Social Security income, will replace 86% to 108% of a worker’s pre-retirement income when she or he retires, again depending on earnings.
Who is right? Mr. Gemini’s view that American workers are destined to live on cat food in retirement? Or Mr. Brady, who asserts that, with moderate contribution rates to their 401(k) and 403(b) plans and Social Security income, Americans will be just fine? I’m not sure and you can draw your own conclusions about the larger picture of how Americans will live in retirement.
What is more important might be for you to answer the key question for yourself -- are you saving enough for retirement? One study showed that less than half of workers know what their target savings goal should be for retirement.
There are several good, free on-line calculators to help you figure out your target. You can find several useful tools for this type of planning at
MSN.com (under the “Money” tab, go to the left side menu and click on “Retirement” under the “Planning” menu). The second thing you can do is to make sure you’re saving enough – at least 10% of your pre-tax earnings ought to be your goal. Even Mr. Brady’s optimistic analysis shows that you need to save at least this much in order to be sure you have a comfortable retirement.
For more information: If you want a copy of Mr. Brady’s white paper visit the Pension Research Council website and sign-up to download research papers; I’ll also send you a copy of his white paper for your use if you send me a request at steve@finpath.com
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Retirement crisis: real or imagined?
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