Money Minded Families. Stephanie W. Mackara

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2 The Current State of “Retirement”

      When people first started “retirement planning,” their focus was often on what was known as a three-legged stool. Each leg of the stool represented a foundation of financial support to count on during retirement, removing the fear of outliving personal resources. The three legs were employer-defined benefit plans or pensions, Social Security, and personal savings. The personal savings leg of the stool was typically used to fund the proverbial “bucket list” while the Social Security and pension supported most people's day-to-day living expenses.

      Retirement planning forecasts were then filled with excellent news. We had great “pensions”; many committed to paying private or federal employees the average of their top-three working years for the rest of their lives! They were getting paid the same amount in retirement as in their top-earning years; a lucky few have actually earned more in retirement than in their working years! The government provided Social Security, incomes were growing, access to more luxury items was available, and most people were working fewer years so that they could enjoy all the wonderful bounty! Life was great.

      But things have changed for most Americans.

      In the previous chapter, we discussed the dramatic decline in the labor force for men age 65 and older at the beginning of this century. What do you think has happened since then? We have seen a marked increase in the labor participation rates of older men, and women, too. In 2009, more than 36% of men ages 65–69 were actively engaged in the workforce. Remember this same participation rate was only 18.4% in 2000. These numbers have similarly increased for men age 70 and older (Source: Older Adults' Labor Force Participation since 1993: A Decade and a Half of Growth, January 2010, Richard W. Johnson and James Kaminski).

Why have Americans started working into what just a few years ago we considered “retirement”? There are many reasons of course. To start, wages have become stagnant, and healthcare and education costs have increased astronomically. Combine this with the disappearance of most private pension systems and a broken Social Security system, and we now have an environment where “retirement” is an elusive concept. Increased personal and national debt also continue to eat away at our ability to both save and invest.

      Remember how generous American Express was in 1875, offering the first private pension for their retired employees? In 2009 they decided it was simply unsustainable and stopped offering these generous pensions. American Express is not unlike many other corporations that simply can no longer afford to pay pensions to their employees. Instead, most have replaced traditional pensions and defined benefits with defined-contribution or what most of us know as 401(k) plans. These plans require employees to save their own money for retirement. This ends up morphing two of the three legs of the retirement stool together, creating a great imbalance toward your personal savings.

      Consider how much a household needs to spend during their retirement years. For those who entered retirement in the 1970s, the typical income replacement rate was about 65% of pre-retirement income, meaning, if you earned $100,000 a year, you would expect to need $65,000 each year in retirement to maintain your current lifestyle. The $65,000 was covered by those three legs of the stool: Social Security, private pension/retirement plan, and personal savings—mostly, if not all, the Social Security and private pensions.

      Using the three-legged-stool example made it easy to understand how much you would need to save for retirement because two of the three legs were static and easily quantifiable. That is, you knew if you retired at 65, you would receive a fixed amount per month in Social Security and a fixed amount per month in pension. These figures may have grown slightly with inflation, but for the most part these were fixed figures. Most individuals entering retirement had little to no debt, so their day-to-day expenses were relatively low as compared to their pre-retirement needs. The only variable was what you contributed toward you own retirement income. For a great number of people, pension and/or Social Security was enough to cover everything.

Today, the three-legged stool has lost two legs and can barely support retirement income needs. Most companies are no longer providing pensions, or the pensions are insolvent. A July 30, 2018, Wall Street Journal article cites that the pension hole or deficit owed to employees for US cities and states is the size of Germany's entire economy. Pause here for a moment. Take that in: the deficit owed to US city employees is the size of Germany, the fourth-largest economy (ranked by GDP) in the world! This is just an enormous debt that continues to grow every day. Social Security has been modified over time and is not sustainable at its current levels. The latest report from the Social Security and Medicare Board of Trustees (as of 2018) suggests that in 2034, Social Security will only be able to pay out at 77% of retirees' benefits and those benefits will be starting later and later in life. Like city pensions, the Social Security commitments continue to grow and, as a country, we continue to brush aside the enormity of the issue. The answers aren't easy, but they are doable with strong leadership. We either cut benefits, increase the benefit age, increase taxes, or borrow from somewhere else in the government to fund the deficit. Each of these has been discussed, but never implemented because, politically, the solutions aren't popular. As a result, here we sit, waiting and watching for it to blow up, not clear when it will happen or who will get this third leg of the stool pulled out from beneath them.

      So, today, most of us are left with one source of retirement savings—ourselves. Not only have two stool legs of support been removed, but our planning must now replace 80% of our pre-retirement income because we are living longer, healthcare is more expensive, and our personal debt—either by way of mortgages or student loans for ourselves or our children—tends to stay with us a great deal longer and often into retirement.

      One of the greatest financial accounts created was the 401(k), or the defined-contribution plan. As we previously discussed, this was created to replace many corporate private pensions and allow individuals to save pre-tax dollars toward their retirement. What most people don't know is that it was never created to be the main source of employee retirement savings it is today. The accidental retirement revolution began in 1978 when Congress passed the Revenue Act of 1978. The Act included a provision, Section 401(k), that gave employees a tax-free way to take money from bonuses or stock options and save without paying taxes, deferring them to some future date. A gentleman named Ted Benna, a benefits consultant at the Johnson Companies, is today regarded as the father of the 401(k). When working with a client who wanted to provide benefits to its employees and also incentivize its employees to save, Ted Benna advised that the new Section 401(k) of the Revenue Act of 1978 could be the solution they needed. There wasn't anything explicit or hidden in the code that said the modern version of the 401(k) could be used as an Employer Deferred Compensation Plan, but there also wasn't anything in the code that said it couldn't. Through some creativity and a bit of a fluke СКАЧАТЬ