You like to-may-toes and I like to-mah-toes…
The Wall Street Journal recently published an article in which two experts examine the same data about retirement savings, coming to widely divergent opinions.1 Anne Tergesen interviewed Alicia Munnell, director of Boston College’s Center for Retirement Research, and Andrew Biggs, resident scholar at the American Enterprise Institute. Munnell believes that virtually one-half of today’s working households will find it impossible to sustain their current standard of living. Biggs responds, “There is no evidence that retirees are cutting discretionary spending like entertainment or charitable contributions.”2 Does this discussion really matter to those in the work-force today? The practical questions are, “Have we saved enough to replace our current earned income during retirement? How much do we need to save now to make that come true?”
The IRS & the Investment Company Institute study
Another study conducted by individuals from the Investment Company Institute and the IRS focused upon the first three years of retirement income for individuals born between 1938 and 1944. The conclusion was these retirees successfully increased their spendable income during the early retirement years.3 The data further showed that the less affluent among the group actually reported a greater income increase post-retirement (123% over the last year’s working income compared to the average of 103%). There were important warning signs in the study however. Nearly one-half of those included in the study continued to work in that three year timeframe. Since the study only covered the first three years of retirement, we have no data about the sufficiency of income and savings during periods when health care needs increase. We might also ask how well the subsequent generations will fare since studies have consistently shown decreasing emphasis on retirement savings among them.
Another obstacle to overcome for future generations
The authors of the ICI/IRS study also noted nearly 90% of those in their study reported having traditional pension plans which are becoming ever more unavailable. According to the Employee Benefit Adviser, 71% of defined benefit plans had either been closed or frozen by the end of 2015.4 Future retirees will have to increasingly rely upon their own savings and defined contribution accounts to fund retirement income needs. Bob Collie, chief research strategist at Russell Investments, points out, “Defined contribution plans…were never designed to be the primary retirement account for anybody.”5 Future retirees will find it harder to replace their income while relying upon plans originally designed to be purely supplemental. If past studies are based upon retirement benefits unavailable to a large portion of future retirees, we must wonder if the study results will apply at all in coming years.
What should be done now to meet the need then?
There is no greater wisdom than “Start Now.” A Chinese proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.” The same is true for retirement planning. If you are 21 and beginning your first job, start NOW. If you are 45, and have not begun saving, start NOW. Waiting makes it more expensive later if you are young. If you are middle aged, waiting has more dire consequences. As the proverb implies, you cannot recapture time that is passed. You must not allow lost time to prevent you from doing what is possible now.
Consider the following illustration of how the Christian Churches Pension Plan might work. Sarah graduates from college and begins working with a local church supported nonprofit shelter. At the age of 23, she approaches the shelter with a request for one unit of the Pension Plan, and $750 per year is sent to the Plan. Sarah shows great promise and becomes a supervisor at the age of 32. The shelter adds another unit for her retirement. The investment is now $1500 annually. At the age of 38, Sarah accepts an offer to become the assistant director of larger nonprofit. Her participation in the Pension Plan is portable and goes with her. At 46, she becomes the Executive Director of her nonprofit and her Board rewards her with an additional 2 units in the Plan. At 65, she retires and begins receiving $1741 for life.6
This is but one example of many publicly available. No matter which financial vehicles are available to you, take advantage of them. Retirement crisis or not, there is no time like the present.
1 Is There Really a Retirement-Savings Crisis? Tergesen, Anne. The Wall Street Journal. April 23, 2017.
2 Tergesen, ibid.
3 Retirees Show Success in Replacing Pre-Retirement Income. Tergesen, Anne. The Wall Street Journal. April 19, 2017.
4 More firms freezing, closing DB plans. Gladych, Paula Aven. Employee Benefit Adviser. November 28, 2016.
5 Could a retirement plan report push employees to save? Gladych, Paula Aven. Employee Benefit News. April 23, 2017.
6 This example is for illustrative purposes only. The exact retirement income is based upon continual annual contributions, the precise date of enrollment of each unit, and the participant’s date of birth. It is not a guarantee of any individual’s actual retirement benefit pursuant to the plan.