January 20, 2014 — It’s the beginning of the year so it must be time to prognosticate about what’s to come and how we might make things better. We have seen several thoughtful pieces along this line, including one from our colleague over at MarketWatch, Bob Powell (“New Laws, Regulations the Experts Want for 2014“).
In this article we are hoping to get our loyal members and readers to reflect on the planning that went into their retirements. Who else is more qualified to talk about retirement than you folks – you are the ones living it now. Do you think any of these proposals would work, and do you have any of your own? We look forward to your reactions and suggestions in the Comments section below.
Something Needs to Be Done
Here at Topretirements we regularly hear from members who are struggling to make ends meet in retirement. There are any number of figures that point to a looming retirement crisis for Americans:
– According to the New York Times 58% of U.S. workers are not included in a pension or 401(k) plan. – In 2010, with the economy still in recession, The Center for Retirement Research at Boston College found that 53% of people age 65 were “at risk” for not having enough money in retirement to maintain their current lifestyle (and it has gotten worse – the figure was 44% in 2007).
– Too many workers either withdraw part of their savings before they retire. Many others spend it too quickly in the first years of retirement.
– Social Security, which provides a paltry average of $15,000 per recipient, makes up at least 90% of the retirement income for a third of the people receiving benefits.
– There are currently 2.8 workers for each Social Security beneficiary. By 2033, there will be 2.1 workers for each beneficiary.
These are some of the solutions to the crisis from here and there. Some come from other countries, including the highly successful Australian system. We have tried to balance the ideal for retirees to have enough income to enjoy retirement, with the reality that there is no free lunch – somebody has to pay for everything we get.
– Mandatory 401k Contributions. Some might say this is big government, and in many ways it is. But since most people can’t seem to manage saving enough on their own initiative, somebody has to make them do it. Social security alone does not provide an adequate amount to live on – it was planned as a basic safety net, not more. Chile and Australia require mandatory contributions (10% and 9% respectively) to a 401(k)-like fund, and those programs seem to be working well. This requirement would have 2 parts: all employers have to provide a 401(k) plan, and all workers have to participate to at least some minimum degree.
– Required Annuities. This proposal might even be more controversial. But, unfortunately, there is an alarming number of retirees who take their retirement savings in a lump sum – and then spend it so fast they are destitute in their 70s. If there was a requirement to take some portion of our 401(k) or IRA savings as an annuity, many people would be saved a life of poverty in their oldest years. For this reason the Netherlands requires that a portion of retirement savings be converted into an annuity.
– Make it more difficult to take Social Security Benefits before Normal Retirement Age (66 for most people). One idea is to require a waiver that the recipient acknowledges they are giving up a significant future benefit by taking it early. Or more draconian, gradually raise the age that we can start collecting from 62 to 66.
– Require Spousal Approval for Early Collection. Since it is women who tend to be victimized by a spouse who takes the benefit early, require a spousal consent form for any married person taking their benefit early. The rational for this is that since women tend to live longer than their husbands, smaller spousal benefits condemn them to a live of poverty in their old age.
– Restrict Early Withdrawals. 401(k) recipients can usually borrow from their own balances. But doing this normally has a great negative impact on future retirement. There are many reasons, such as the education of a child, that are permitted reasons now. By making it more difficult to withdraw savings, more people would enter retirement with a meaningful balance.
– Fix Social Security and Medicare for the long term. Both programs are popular and fulfill important needs. But both are in serious need of reform if they are to stay solvent. No President or anyone in Congress seems to have the stomach to work on the problem. There are solutions: like delaying benefits, increasing contributions, changing the inflation formula, or reducing the benefits to higher income people. Maybe you have an idea. But somebody needs to work on the problem instead of ignoring it.
Comments? What worked, or didn’t work, for you in your retirement planning? Is there something you could have done differently, or a corporate or government program that would have been helpful? Please let us know in the comments section below.
For further reading:
How They Do It Elsewhere (excellent NY Times article profiling how other countries manage retirement funding)