Retirement Hearing Witnesses Share What Works

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Retirement Hearing Witnesses Share What Works

Postby pkcrafter » Fri Feb 01, 2013 10:43 pm

Interesting article on getting investors to use their 401ks.

Moslander pointed out that many eligible workers still do not participate in their DC plans, and those that do often have a difficult time saving the 10% to 15% of their annual income that most financial experts agree is necessary to achieve a secure retirement.


According to McCarthy, participants need help understanding a range of financial topics—from the most basic information about how to enroll in their plans and how much they should save to more complex topics such as proper asset allocation and retirement income planning.


http://www.plansponsor.com/NewsStory.aspx?id=6442491315

It's clear that basic investor education is desperately needed and experts agree, but we never see anything actually being done.

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Re: Retirement Hearing Witnesses Share What Works

Postby TF Hutch » Fri Feb 01, 2013 11:12 pm

This web site educated me.
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Re: Retirement Hearing Witnesses Share What Works

Postby umfundi » Sat Feb 02, 2013 2:29 am

pkcrafter wrote:Interesting article on getting investors to use their 401ks.

Moslander pointed out that many eligible workers still do not participate in their DC plans, and those that do often have a difficult time saving the 10% to 15% of their annual income that most financial experts agree is necessary to achieve a secure retirement.

Paul


Paul,

I think the situation is even worse. Defined Benefit (DB) plans are disappearing, and they cost employers about 15%. The 10-15% quoted above is (I believe) what employees should save in a Defined Contribution plan like a 401k in addition to a DB plan. If there is no DB plan, the savings percentage should be higher. Double?

Keith
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Re: Retirement Hearing Witnesses Share What Works

Postby justus » Sat Feb 02, 2013 6:28 am

umfundi wrote:
Paul,

I think the situation is even worse. Defined Benefit (DB) plans are disappearing, and they cost employers about 15%. The 10-15% quoted above is (I believe) what employees should save in a Defined Contribution plan like a 401k in addition to a DB plan. If there is no DB plan, the savings percentage should be higher. Double?

Keith


Keith,

Are you saying that if a person doesn't have a pension, they must save 20-30% of their income (double the 10-15%)?
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Re: Retirement Hearing Witnesses Share What Works

Postby Call_Me_Op » Sat Feb 02, 2013 8:30 am

Not having a mortgage in retirement is often key. My folks live just fine on modest Social Security incomes because they live in a house that is free of a mortgage. If they had to make a sizable monthly mortgage payment, they'd soon be in trouble.
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Re: Retirement Hearing Witnesses Share What Works

Postby umfundi » Sat Feb 02, 2013 8:54 am

justus wrote:
umfundi wrote:
Paul,

I think the situation is even worse. Defined Benefit (DB) plans are disappearing, and they cost employers about 15%. The 10-15% quoted above is (I believe) what employees should save in a Defined Contribution plan like a 401k in addition to a DB plan. If there is no DB plan, the savings percentage should be higher. Double?

Keith


Keith,

Are you saying that if a person doesn't have a pension, they must save 20-30% of their income (double the 10-15%)?


Yes, that's what I am implying.

For my generation (I am 62) the mantra was that of the three-cornered stool: Social Security, a DB pension, and your own savings would each contribute about a third of your retirement income. If there is no DB pension, then your own DC savings have to make up two thirds.

As a quick estimate, suppose each leg of the stool is $25,000 per year. That implies a nest egg of about $625,000 at retirement. By my estimate, that will take about 15% of a $75,000 salary saved over 30 years. If you are now responsible for two legs, you need to double that.

I know that some companies have replaced DB pensions with some kind of DC plan, but I believe the company's contribution is generally much lower than 15%.

Keith
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Re: Retirement Hearing Witnesses Share What Works

Postby jeffyscott » Sat Feb 02, 2013 10:29 am

umfundi wrote:As a quick estimate, suppose each leg of the stool is $25,000 per year. That implies a nest egg of about $625,000 at retirement. By my estimate, that will take about 15% of a $75,000 salary saved over 30 years. If you are now responsible for two legs, you need to double that.


This analysis is flawed, if one were to save 30% of their $75,000 income, they'd be saving $22,500 and paying $5700 in payroll taxes, thus for everything else they would have $46,800 available. So this means they (at most) only need to save enough to provide that level of income.
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Re: Retirement Hearing Witnesses Share What Works

Postby jeffyscott » Sat Feb 02, 2013 10:36 am

pkcrafter wrote:
According to McCarthy, participants need help understanding a range of financial topics—from the most basic information about how to enroll in their plans and how much they should save to more complex topics such as proper asset allocation and retirement income planning.


It's clear that basic investor education is desperately needed and experts agree, but we never see anything actually being done.


This will never work. The experiment with making everyone their own pension fund manager is a disastrous failure. "Investor education" is not going to fix it.

What most participants truly need is for someone trustworthy to take their money from them, invest it for them, and then provide them an income in retirement with the proceeds.
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Re: Retirement Hearing Witnesses Share What Works

Postby Grt2bOutdoors » Sat Feb 02, 2013 6:40 pm

jeffyscott wrote:
pkcrafter wrote:
According to McCarthy, participants need help understanding a range of financial topics—from the most basic information about how to enroll in their plans and how much they should save to more complex topics such as proper asset allocation and retirement income planning.


It's clear that basic investor education is desperately needed and experts agree, but we never see anything actually being done.


This will never work. The experiment with making everyone their own pension fund manager is a disastrous failure. "Investor education" is not going to fix it.

What most participants truly need is for someone trustworthy to take their money from them, invest it for them, and then provide them an income in retirement with the proceeds.


That will never work either - there is too much self-interest in managing assets. The order of priority should be 1)investors 2)management company 3)brokers, instead we have the reverse in practice: 1)management company 2)brokers 3)investors. Investors are consistently receiving the short-end of the stick in the majority of cases.
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Re: Retirement Hearing Witnesses Share What Works

Postby Grt2bOutdoors » Sat Feb 02, 2013 6:42 pm

umfundi wrote:
justus wrote:
umfundi wrote:
Paul,

I think the situation is even worse. Defined Benefit (DB) plans are disappearing, and they cost employers about 15%. The 10-15% quoted above is (I believe) what employees should save in a Defined Contribution plan like a 401k in addition to a DB plan. If there is no DB plan, the savings percentage should be higher. Double?

Keith


Keith,

Are you saying that if a person doesn't have a pension, they must save 20-30% of their income (double the 10-15%)?


Yes, that's what I am implying.

For my generation (I am 62) the mantra was that of the three-cornered stool: Social Security, a DB pension, and your own savings would each contribute about a third of your retirement income. If there is no DB pension, then your own DC savings have to make up two thirds.

As a quick estimate, suppose each leg of the stool is $25,000 per year. That implies a nest egg of about $625,000 at retirement. By my estimate, that will take about 15% of a $75,000 salary saved over 30 years. If you are now responsible for two legs, you need to double that.

I know that some companies have replaced DB pensions with some kind of DC plan, but I believe the company's contribution is generally much lower than 15%.

Keith


In a number of cases - pensions are overly generous especially in the municipal arena. But I agree, savings over time should be higher than 20%, I was thinking 25% of gross.
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Re: Retirement Hearing Witnesses Share What Works

Postby ourbrooks » Sat Feb 02, 2013 7:02 pm

Grt2bOutdoors wrote:In a number of cases - pensions are overly generous especially in the municipal arena. But I agree, savings over time should be higher than 20%, I was thinking 25% of gross.


Outside of the public sector, they aren't generous at all. Most private sector pensions are aimed at replacing 35% of final salary. The idea, as umfundi pointed out, was to have about 1/3 from the pension, 1/3 from Social Security and 1/3 from personal savings. Its an interesting discussion whether most people need 100% of final salary; on the other hand, few people find that Social Security covers a third of their final income.

As I've pointed out in other threads, a corporate pension generally has a much better payout than an annuity purchased on the open market. If the corporation simply arranges with an insurance company to pay the pension, they're still likely to get a better rate than an individual purchasing the same annuity from the same company.

The bad news is the party's over and those saving now for retirement will have to save much more personally than earlier generations.
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Re: Retirement Hearing Witnesses Share What Works

Postby grabiner » Sun Feb 03, 2013 12:35 pm

ourbrooks wrote:
Grt2bOutdoors wrote:In a number of cases - pensions are overly generous especially in the municipal arena. But I agree, savings over time should be higher than 20%, I was thinking 25% of gross.


Outside of the public sector, they aren't generous at all. Most private sector pensions are aimed at replacing 35% of final salary. The idea, as umfundi pointed out, was to have about 1/3 from the pension, 1/3 from Social Security and 1/3 from personal savings. Its an interesting discussion whether most people need 100% of final salary; on the other hand, few people find that Social Security covers a third of their final income.


And most public-sector employees who get larger pensions than the 35% do not pay into Social Security. For example, federal government workers under the old CSRS system receive 56.25% of their high-3 average salary if they retire after 30 years, but no Social Security; those under the new FERS system receive 30% (33% if over 62) but also get (and pay into) Social Security and receive a 5% match on Thrift Savings Plan.
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Re: Retirement Hearing Witnesses Share What Works

Postby bobcat2 » Mon Feb 04, 2013 11:51 am

jeffyscott wrote:The experiment with making everyone their own pension fund manager is a disastrous failure. "Investor education" is not going to fix it.

What most participants truly need is for someone trustworthy to take their money from them, invest it for them, and then provide them an income in retirement with the proceeds.
:thumbsup :thumbsup

Previously this was accomplished by companies providing DB pensions. Now it needs to be accomplished within the framework of the DC retirement plan. In other words, we need 401k retirement plans and 403b retirement plans that function like DB pension plans.

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Re: Retirement Hearing Witnesses Share What Works

Postby Grt2bOutdoors » Mon Feb 04, 2013 12:02 pm

bobcat2 wrote:
Previously this was accomplished by companies providing DB pensions. Now it needs to be accomplished within the framework of the DC retirement plan. In other words, we need 401k retirement plans and 403b retirement plans that function like DB pension plans.

BobK


To have a retirement plan function like a DB plan you would need a combination of things - 1)steady employment to allow the person to benefit from the compounding of mandatory contributions 2)a minimum contribution rate of 20% (how many do we know can't even make a 10% contribution today?) 3)an automatic (no opt-out) conversion of plan assets into a lifetime annuity and or option to take a reduced payout with remaining assets paid out to beneficiary of estate.

We have zero of those options today - everything must be purchased or done in piecemeal leading to much higher costs - costs being defined as breaks in service, higher er's and or reduced annuity payout rates and the reduced levels of contributions.

I don't think this is what Ted Benna had in mind when he got crowned the king of 401k plans.

Is it fair to say that old DB plans were the equivalent of a Ponzi scheme, new workers were sold a bill of goods touting the benefit of such a plan, only to have the rug pulled out from underneath them? BTW, there is a front page article in the WSJ today that speaks about the large cash contributions being required of Fortune 500 companies due to the declining discount rate leading to large non-cash charges amounting to billions of dollars. The pension plan is going the way of the Dodo bird - the writing is on the wall.
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Re: Retirement Hearing Witnesses Share What Works

Postby umfundi » Mon Feb 04, 2013 12:24 pm

bobcat2 wrote:
jeffyscott wrote:The experiment with making everyone their own pension fund manager is a disastrous failure. "Investor education" is not going to fix it.

What most participants truly need is for someone trustworthy to take their money from them, invest it for them, and then provide them an income in retirement with the proceeds.
:thumbsup :thumbsup

Previously this was accomplished by companies providing DB pensions. Now it needs to be accomplished within the framework of the DC retirement plan. In other words, we need 401k retirement plans and 403b retirement plans that function like DB pension plans.

BobK

One way that can happen is to have good (fair) options to annuitize a lump sum, perhaps inside a 401k/403b. I believe that is somewhat the case in countries like Britain and Australia.

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Re: Retirement Hearing Witnesses Share What Works

Postby Grt2bOutdoors » Mon Feb 04, 2013 1:20 pm

umfundi wrote:
bobcat2 wrote:
jeffyscott wrote:The experiment with making everyone their own pension fund manager is a disastrous failure. "Investor education" is not going to fix it.

What most participants truly need is for someone trustworthy to take their money from them, invest it for them, and then provide them an income in retirement with the proceeds.
:thumbsup :thumbsup

Previously this was accomplished by companies providing DB pensions. Now it needs to be accomplished within the framework of the DC retirement plan. In other words, we need 401k retirement plans and 403b retirement plans that function like DB pension plans.

BobK

One way that can happen is to have good (fair) options to annuitize a lump sum, perhaps inside a 401k/403b. I believe that is somewhat the case in countries like Britain and Australia.

Keith


DFA and Financial Engines have products that switch into annuities to ensure a floor level of income upon retirement. The issue with this is who wants to purchase an annuity today given the low rate enviornment potentially leading to regret later on?
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