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Government ineptitude strikes again May 29, 2015

Posted by forwardfinancialplanning1 in Retirement Spending.
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All of us rely on government statistics to some degree as we make decisions in life.  Of course, central to that decision making process is the belief that the data spewing out of Washington is accurate.  At the risk of being labeled as “cynical”, I’ve always wondered how accurate these number really are.

A recent analysis by the non-profit Employee Benefit Research Institute (EBRI) highlights the validity of my concerns.  We often read about doomsday predictions based on aging baby boomers’ collective lack of retirement preparedness.  Many of these forecasts lament that while a large portion of today’s elderly population has exhausted their retirement resources (and thus, rely solely on Social Security), it’s going to be even worse for the baby boomers.  Yet, somehow, we Americans seem to muddle through and we don’t hear stories of widespread deprivation of the elderly.  I expect that the baby boomers will do likewise.

The EBRI estimates that the US Census Bureau’s “Current Population Survey” (CPS)  has been underestimating the income of Americans aged 65 and older by $133 billion.  Phrased another way, the CPS was under-reporting IRA and 401k income by more than 250%!!  The Annual Social and Economic Supplement to the CPS is a widely cited source of income data for those 65 and older.  The survey questions misclassified income because they had not been adjusted to reflect the change in the nature of private sector retirement plans from primarily defined benefit plans to defined contribution plans.

So, here’s a heads-up to the government workers who still overwhelmingly have generous defined benefit retirement plans (which are bankrupting many states, and eventually the federal government).  Wake up!!  The people who pay your salaries and your pension benefits don’t have the same sweet deal that you do.


We’re going in the wrong direction… February 4, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The Center for American Progress has just released a study that can hardly be deemed as “progress”.

About 31% of Americans have nothing saved for retirement and also lack a defined benefit plan, such as a traditional pension. Among the age group closest to retirement (55-64 year olds), about one fifth (19%) reported no savings at all.

Of the 55-64 year olds who have saved something for retirement, the median retirement account balance was only $14,500. If you strip out the households who have saved nothing, the median retirement account balance of this age group rises only to $104,000.

While $104,000 is not an insignificant sum, it’s not going to support the life style that most of these households expect. Using the withdrawal rule of thumb which allows annual distributions of about 4%, we’re still only projecting about $5,000 per year. And income taxes will eat up a portion of this as well!!

Looks like a lot of people are going to be working well into their 70’s—or depending on the government. Neither of these outcomes look like progress to me.

On-line security matters with retirement accounts December 23, 2014

Posted by forwardfinancialplanning1 in Retirement Savings, Retirement Spending.
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We’ve heard a great deal about security breaches which have taken place with major retailers like Target and Home Depot that expose our credit/debit card numbers to thieves. However, illegal access to our retirement accounts is potentially even more hazardous to our wealth. Yet we don’t see as many headlines, perhaps because of a smaller number of individuals being affected by each occurrence.

But, it does happen! The Missouri State Employees Retirement System (MOSERS) was the latest victim, where there are confirmed reports of four employees accounts being hacked. The administrator stated that attempts were made to extract money, but none was removed from the affected accounts. As a safety measure, all on-line passwords and security questions were reset, causing participants to re-establish their on-line credentials.

Plan Sponsor magazine reports at least fifteen instances in recent years of unauthorized entry into government retirement systems and/or employee benefit service providers.

“You don’t know what you don’t know…” December 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Financial Planning, Retirement Savings, Retirement Spending.
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One of my best friend’s favorite euphemisms is, “you don’t know what you don’t know”. He is generally using this to describe peoples’ “clueless” behavior in various situations and circumstances. While his frequent utterances usually give us something to laugh about, a recent study by the American College is no laughing matter.

In the Retirement Income Literacy Survey, researchers found that respondents posted an average score of 42% on the 38 question quiz and only 20% achieved a passing grade of 60% or better. Despite this demonstrated lack of knowledge, 97% of survey participants rated themselves as either “knowledgeable” or “somewhat knowledgeable” about saving for a comfortable retirement.

The results of the entire research project can be found at:
http://www.theamericancollege.edu/ricp-retirement-income-survey/index.php ).

Movie Review September 28, 2014

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Personal Budgets, Retirement Savings, Retirement Spending.
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We’re generally not in the business of conducting movie reviews, but regular readers know that the woeful state of America’s retirement preparedness is a common theme of this blog. This topic is well addressed by the creators of “Broken Eggs” which is now available at no cost to viewers. It makes our case far better than we could.

Have a look at: http://brokeneggsfilm.com/broken-eggs-movie/#.

“You can’t fix stupid….” August 7, 2014

Posted by forwardfinancialplanning1 in 401k plans, Financial Planning, Retirement Savings, Retirement Spending, Roth IRA, Social Security, Traditional IRA.
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I’ve heard people mutter these words many times over the years, but always felt that they were a bit too fatalistic. After all, everyone has the capacity to learn, although the inclination and motivation to do so may be lacking. However, after reviewing a section of the Federal Reserve’s Report on the Economic Well-Being of the U.S., I’m starting to think there’s some truth to such a cynical adage. When asked how they and their spouse will pay for expenses in retirement, an incredible one quarter of all respondents and 14% of those aged 45 and greater chose the answer, “I don’t know.”

I mean, at least they could have said, “winning the lottery……”

We knew somebody was picking up the tab……… April 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Economic Conditions, Fixed Annuities, Investing-General, Retirement Spending.
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I’ve had numerous conversations over the past few years with clients who are puzzled by US Federal Reserve policy. Several have commented that the Fed seems to be “creating money” out of thin air. They recognize that there are no “free lunches” in the real world and many wonder, “Will there be repercussions somewhere in the system?”

As is always the case, there are repercussions, and National Bureau of Economic Research President, James Poterba “nailed it” with a recent research release. Poterba estimated that a 65 year old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than he would have needed in 2005. Academics can argue all they want about central bank policy. but this observation definitely “hits home” for retirees.

“What, me worry?” February 4, 2014

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings, Retirement Spending.
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This line was made famous in my youth by Alfred E. Newman, the well known icon from Mad Magazine. And today, it succinctly describes the typical American’s approach to retirement planning. A recently published analysis of surveys across 21 nations by the Pew Research Center found that US residents are less likely to be worried about their old age futures than most residents of Europe and East Asia.

About 63% of those Americans surveyed said they were “very confident” or “somewhat confident” about their retirement security. These sentiments would seem to be hard to support, however, if one looks at Americans’ financial resources dedicated to retirement. The exact numbers depend on which research study is cited but there’s nearly universal agreement that there’s not enough money saved to justify such optimism. Average 401k balances are in the $25,000 range and even the 55-64 age grouping averages under $100,000 in retirement assets. When you apply the traditional (in financial planning circles) 4% per year withdrawal rate against these balances, it’s evident that it’s not going to generously fund a potential retirement of 20-30 years.

Many of us must have selected Alfred E as their financial planner……………

At least some of us are getting it right…………… January 11, 2014

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The financial press publishes article after article bemoaning the lack of retirement preparedness in the US. And, this blog has opined on this very topic on numerous occasions. Some commentators cite these statistics as proof that our general population is incapable of saving/managing within the defined contribution (e.g. 401k’s, 403b’s etc) retirement system that has largely replaced defined benefit retirement plans over the past 25 years. Well, a recent study by the Vanguard Center for Retirement Research suggests that at least some defined contribution plan participants are actually “getting it right.”

In a very thorough analysis of plan participant distribution behavior, Jean Young of Vanguard reported that most retiring participants are rolling dc plan balances into IRA’s and leaving the balances untouched until Required Minimum Distribution rules kick in at age 70 1/2. Young noted that 7 in 10 retirement age participants (defined as those 60 and older terminating from a dc plan) have preserved their savings in a tax-deferred account after five calendar years. The study determined that nine out of ten retirement dollars still remained within an IRA or the original employer retirement plan.

It’s even more noteworthy that the study period included the years 2008-09 when the financial crisis placed abnormal stresses on household finances. All told, analysts examined the behavior of 266,900 employer plan participants aged 60 or older who terminated employment in calendar years 2004 through 2011.

So, it’s not all gloom and doom as some would like us to believe.

Will it be as bad as they say….? December 19, 2013

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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Read two articles today that when combined, suggest a very bleak future as our country ages. The first research paper attempted to quantify the differences in retirement readiness among various races in the US. The first paper is entitled “Race and Retirement Insecurity in the United States” by Nari Rhee. Rhee finds that while the typical white household has clearly undersaved, the shortfall is even worse for black and Latino households. The report notes that the typical white household nearing retirement has about $30,000 saved in retirement accounts while the typical black or Latino household has virtually nothing in dedicated retirement accounts. Looking at the problem via average accumulation amounts, white households fared best with $112,000 saved on average versus $20,000 for blacks and $18,000 for Latinos. When one applies the oft-cited 4% annual sustainable withdrawal rule to these account balances, it’s very obvious that they won’t last very long after the regular paychecks stop.

The prognosis becomes even more disconcerting when the data for the second article is superimposed. According to research by Ron Gebhardtsbauer, associate professor of actuarial science at Penn State University, a 65 year old man has a life expectancy of 82 and a 30% chance of living to 90. A 65 year old woman has a life expectancy of 85 and a 40% chance of living to be 90. A 2011 report by the Census Bureau concluded that a 90 year old in the US has a further life expectancy of nearly five years.

So, the good news is that we are living much longer, but the bad news is that we’ve not saved enough money to support our golden years. I’ve read numerous other studies with somewhat different accumulated amounts, but in every case, the dollars saved are always far too low to fund a 20-25 year retirement. During my lifetime, it’s always seemed that the American spirit finds a way to collectively pull us through. Will that be the case this time?