Wednesday, March 01, 2006



Retirement: Ready or not? Not, apparently

A summit in D.C. considers what can be done to help workers save more for their post-career lives.

By Jeanne Sahadi, senior writer
March 1, 2006: 5:21 PM EST

NEW YORK ( – This week in Washington, D.C. government leaders, retirement experts and financial services executives are meeting to discuss what employers, lawmakers and workers themselves can do to help Americans be better prepared for retirement.
Ok, I'm with you so far, I think to myself as I'm reading this.

Overall, only about 60 percent of workers over 40 who are eligible to participate in their 401(k)s do, and the number of workers covered by a defined-benefit pension has steadily declined. Meanwhile, young workers have the lowest 401(k) participation rates of all workers under 65.
This surprised me. Of course defined-benefit pension plans have steadily declined in popularity. The increasing complexity of rules regarding funding of pensions, the disadvantages to workers who don't stay with the same organization until retirement, and the looming massive unfunded liabilities that many of these pensions face are all reasons that many places have switched to defined-contribution plans. While defined-contribution plans have their own challenges, they are quite popular with workers. The portability of most plans is very useful to those of us that will probably work for seven or more places in our work lives and change careers at least once before retirement.

The fact that 40% of eligible people don't participate in a 401k actually shouldn't surprise me. The U.S. savings rate is quite low. It appears negative in most studies, meaning we spend more than we take in. The reason for this extra-low savings rate is that the U.S. government savings rate calculations don't include home appreciation and capital appreciation. In other words, think of all those home mortgage refinancing advertisements and stock portfolios. However, even including these things, the savings rate is still worryingly low.

Congress is considering legislation that would encourage all employers to offer automatic enrollment in 401(k)s and set the default contribution rate at 3 percent of pay, increasing one percentage point every year until 6 percent of pay is reached.
"Encourage" employers? That's an odd choice of wording. Usually legislation mandates something. "Encouragement" sounds toothless.

Also, 3-6% isn't really that much. 3% of 50k is only $1500 a year. OK, it's something, but it's not much, especially when you look at how much you're allowed to contribute per year to your 401(k) and IRAs.

For 2005, the maximum allowable annual contributions for traditional and Roth IRAs were $4,000. For 401(k) plans, the maximum is $14,000 in a year. Both allow special catch-up contributions for people age 50 and older. For 401(k) plans, the catch-up is an additional $4,000 (for a maximum of $18,000). For IRAs, the catch-up contribution is $500 (for a maximum of $4,500). So, what's the real reason for not maxing out our contributions every year? There really isn't one, considering the huge tax savings that these plans offer, and how really cruddy it can get on a fixed income when you don't want to or can no longer work.

The legislation would also encourage companies to offer a 50 percent matching contribution or contribute 2 percent of pay for all employees whether they contribute or not.
There's that "encourage" word again. Unless it's mandated, most businesses, especially small ones, will continue to do whatever they do.

Of most immediate concern is the status of Baby Boomers, who are next in line to retire.

According to research from Fidelity Investments, Baby Boomers only have enough in savings and other income sources to replace 59 percent of their pre-retirement income. Of those with 401(k) accounts, the average account balance is just $80,000, and many typically save just $2,750 a year toward retirement.
That's just plain sad. $80,000 on average means half have saved more, but half have saved less. $80,000 doesn't go very far if you live another 20 years after retirement. 59% of pre-retirement income may suit many people just fine, though. Working consumes money to make money. You have transportation and clothing and other expenses. It's never made 41% difference in my working years, but maybe it does for people that actually had to look presentable at work, and drove more than 9 minutes to get to their office.

Of course, baby boomers were the last ones to get all those great pensions, so surely they're covered in other ways.

You may think that's because they all have a pension coming to them. Not so. Only 57 percent of them expect to receive a pension, according to Fidelity.
Doh! Now it's not just sad, but inexplicable.

For those who do and who wish to reduce their working hours near the end of their careers, lawmakers are considering changing some rules so that workers could "phase in" their retirement, for example working part-time for their employers from 62 to 65 and collecting a portion of their pension at the same time.
I like the plan where I can phase in my retirement from the start. Like, can I get a gold watch and a party on my first day?

A Watson Wyatt analysis found that a 62-year-old worker making $100,000 could generate between $10,000 and $20,000 more in pre-tax income under such an arrangement than if he entered full retirement at 62 and collected his full pension.

Currently, regulations often prevent most workers from collecting benefits while still working for the company providing their pension.

For workers under 50, the chances of having a pension are declining. Since 1980, the percentage of private sector workers covered by defined-benefit pensions has fallen from about 35 percent to under 20 percent.

And tens of thousands of workers have learned in the past two years that their companies are freezing their pension plans, meaning the workers will no longer accrue benefits and will need to save more to make up for lost accruals.

To help educate the public about what they will need to do to adequately fund their golden years, the Department of Labor, which is sponsoring this week's retirement summit, has just published a booklet called Taking the Mystery Out of Retirement Planning.

Well, there really is no mystery. Delayed gratification can be hard.

You might have to give up some "stuff" to save for retirement. Running the numbers on even the most rudimentary internet calculator, and taking to heart the lessons of others that have had pension and 401(k) problems is another eye-opening responsibility. It's amazing how much money you need just to meet the average needs of an average lifespan in an average cost-of-living area. I didn't have nearly an appreciation for the amount of money needed for retirement until actually running the numbers using some planning spreadsheets.

Things worth doing are rarely easy, and most people just don't think a lot about the future. The only trouble is, the future is inevitable, and people aren't saving nearly enough. It's not that hard if you make it a priority, but it's hard to hear the message through all the noise.

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