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Hey, Dude, Where’s My Money?

Jan 11, 2009
In the year between October 2007, when the market peaked, and October 2008, more than $2 trillion worth of stock value held in 401(k)s, IRAs, and “defined-contribution” (e.g., pension) plans was wiped out, according to the Boston College Center for Retirement Research. This amounts to something in the neighborhood of 40 percent of their value.

An article in last Thursday’s Wall Street Journal, “Big Slide in 401(k)s Spurs Calls for Change,” by Eleanor Laise,1 has 35-year-old Kristine Gardner, an IT project manager from Longview, Washington (is there irony in that place name?) bewailing her losses: “There’s no guarantee that when you’re ready to retire you’re going to have the money. You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Maybe Kristine will be ready to listen now to that simple piece of advice one hears at every Prepare-For-Your-Retirement seminar one attends: The closer you get to retirement, the less of your nest egg should be placed at risk. The market is for the long run, not for the home stretch to retirement. From our mountaintop perspective of 63 years, we can reassure Kristine that if she doesn’t lose her nerve and bail out when the market is in the basement, things should look rosier in 30 years—although “past performance is no guarantee of future results.”

The tanking of the market—the most precipitous drop most of us can remember—has indeed been a disaster. At least one billionaire who didn’t get bailed out (the only one?) committed suicide last week.2 The important point made by the Journal article, however, is in the headline. The market decline has produced all sorts of calls for change in retirement instruments. 401(k)s essentially replaced pension plans provided by companies. The latter were like an annuity or Social Security, in that they guaranteed a specified amount to a retiree for life. You knew where you stood. 401(k)s, on the other hand, guarantee nothing, and require workers to manage their own money. And even the most level-headed and least greedy among us took a hit in the recent downturn.

Some are now arguing for federalizing retirement funding, limiting the maneuvering room workers have to manage their savings, and other fairly radical proposals. The barn door has violently banged open, the horse—40% of our riskiest assets—is history (at least for now), and naturally everyone is screaming in pain. It is going to get worse, but it is also going to get better. Best we should calm down and try to take the long view (see above).

The progressive view—at least this progressive’s view—is that just as the worker is worthy of their hire, the retiree is worthy of a secure and comfortable retirement, free from anxiety over the money running out. The present arrangement does not provide that. Market volatility is too great for people who should be more risk-averse than many are, and many people simply don’t put aside enough—too often because they don’t earn enough—to assure a worry-free retirement.

With the Boomers living longer and facing retirement in huge numbers (the first generation heavily dependent on 401(k)s), the last thing our society needs is a horde of destitute old people. However, that may be exactly what we are in for. Therefore the current alternatives available to us must be enhanced, and we must, as a society, protect one another from destitution however we can.

The problem is a complicated one, and the sooner we begin discussing it calmly and progressively, the sooner we will come together with a solution.

Note: In an effort to recharge our batteries and prepare for the dawn of a new political day in America, we will take a week off All Together Now. We expect to be back on Monday, January 19—Inauguration Eve. Until then, thanks for reading!
1 The Wall Street Journal, Thursday, January 8, 2009, pp. 1, 12
2 Banks rescue suicide billionaire’s interests, from CNN.com, January 7, 2009, accessed January 8, 2009
tags: Retirement

No Rest for the Weary1

Oct 14, 2008
If we were to retire and begin collecting Social Security as early as we could (age 62), our payments would be just about enough to purchase health insurance. We probably wouldn’t need it for long since, absent any funds for food, we would starve to death before too long.

The boomer generation, of which we are among the earliest, is approaching retirement age this year, and they have saved, on average, only $38,000, not counting pensions, homes, and social security.2 Those with qualified retirement plans such as 401(k)’s, have an average retirement savings of $88,000. Still that is only enough to generate an annual retirement income of about $5,000.

With the current meltdown of the international financial system, retirement considerations are coming to the forefront of most older people’s attentions. AARP has published a report summarizing the results of a poll taken in September entitled Retirement Security or Insecurity?: The Experience of Workers Aged 45 and Older. The poll assessed people’s expectations regarding their retirement years in light of the current fiscal troubles. Some of the report’s findings, if you are in this particular boat at the present time, may sound familiar:

  • A majority (69%) are anticipating a lower standard of living when they retire, lower even than what they might have looked forward to before the current troubles began.
  • Most people (65%) expect to delay retirement and work longer.
  • Most people (58%) believe they are not saving enough for retirement.
  • Retirement plans offered by employers (e.g., 401(k)) are a powerful aid toward retirement savings. Sixty-three percent of workers whose employer does not offer such a plan would take part in one if their employer did. Furthermore, workers whose employer does offer such a plan are more likely to save outside of work as well (contributing to a Roth IRA, for instance), than workers who are not offered such a plan (59% to 51%).
  • Additional economic strains felt over the past 12 months have resulted in many having difficulty paying basic bills (56%); having to help a family member pay bills (47%); looking for additional work hours or better-paying jobs (24% and 18%); suspending retirement account contributions or prematurely withdrawing money from such accounts (20% and 13%); or having a family member move in with them (12%).
Meanwhile, the CEO of the bankrupt Lehman Brothers, Richard Fuld, walked off the pile of ashes of the company he was instrumental in destroying with almost a half a billion dollars in salary, stock options, and bonuses(!) received since 2000.3 Growing inequities in wealth, begun in the Reagan years and vastly accelerated during the Bush 2 administration,4 are making themselves starkly apparent in these hard times. Lower and middle class incomes have stagnated or deteriorated while the Fulds of the world, riding a tsunami of deregulation wrought by Democrats and Republicans alike, have plundered our national economic center and left the global financial scene in tatters.

We may be relatively certain the next administration will not fix this. The question is, what will the one after it do?
1 Our illustration is The Gleaners by Jean-Francois Millet. Click the link to see a larger copy.
2 Average Retirement Savings—All Measurements Lead to the Same Conclusion (Accessed October 11, 2008)
3 Lehman Brothers Boss Defends $484 Million in Salary, Bonus, by Brian Ross and Alice Gomstyn, from ABC News, October 6, 2008 (Accessed October 11, 2008)
4 Bill Moyers Talks with David Cay Johnston, author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense, January 18, 2008. This interview, conducted before it all hit the fan, is frightening in its prescience. (Accessed October 11, 2008)
tags: Retirement

Having It Both Ways

Aug 30, 2008
Two reports came across our desk on the same day last week, regarding the Medicare Part D drug benefit program, about to enter its fifth year.

One was from the Department of Health and Human Services’ Centers for Medicare & Medicaid Services (CMS), entitled, Lower Medicare Part D Costs Than Expected in 2009. (We guess that’s not ungrammatical, but we know there’s something wrong with that acronym.)

The other was from the Kaiser Family Foundation and is linked below. Their report is entitled, “New Study Examines Impact of ‘Doughnut Hole’ on People Enrolled in Medicare Drug Plans in 2007.”

They must have named the Medicare Part D Drug Plan after the Marquis de Sade. It is the most sadistic imposition of bureaucracy, anxiety, and expense on an aging and ailing population that anyone could possibly come up with.

The first report is, predictably, all pie in the sky. It claims Part D beneficiary satisfaction “remains high” without getting specific, and notes that the basic monthly premium for 2009 will be about $28, a full $14 less than expected at the enactment of the program in 2003.

Segue to the Kaiser report. Here we find that beyond that reasonable monthly premium, Part D also calls for a $275 deductible and, thereafter, a 25 percent co-pay up to the first $2,510 in annual drug costs. Reach that plateau and the fun really begins. Now you’ve arrived at the dreaded Doughnut Hole, a sort of reverse eye of the hurricane, where all is not quiet and where you are on your own for your full prescription drug costs for the next $3,216.

The purpose of the Kaiser report, which was produced in collaboration with Georgetown University and NORC (an apparently orphaned acronym) at the University of Chicago, is to report on the extent and impact of the Doughnut Hole catastrophe in 2007. Then, 26 percent of non-low-income enrollees (low-income people have some protections built in) reached the coverage gap, and 15 percent of them simply stopped taking their medicine. Those who continued saw their monthly out-of-pocket drug expenses soar from $104 (no, not $28) to $196.

So here is what is awaiting us all in our twilight years: A bewildering shopping expedition—with a hefty penalty for dragging our feet—to decide on a plan from a multitude of apples and oranges from which to choose. And thereafter one in four of us can look forward to running out of coverage and paying the full freight on our drugs for, on average, the last third of the year.

Meanwhile, up in the clouds, the Marquis chuckles.
tags: Retirement

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Take My Money—Please

Jul 05, 2008

Just because you're paranoid doesn't mean people aren't following you around.

Case in point: The Brookings Institution has just come up with a plan to grab my—and your—retirement nest egg. The plot is lovingly obfuscated in their recent publication, “Increasing Annuitization in 401(k) Plans with Automatic Trial Income.”

Now annuities, in and of themselves, are not evil. You have a certain amount accrued in your retirement accounts (IRAs, 401(k)s, pensions, etc.). When retirement comes, how are you going to assure that those funds are withdrawn in such a way that they will last as long as you do? One way is to purchase an annuity. For a set amount of up-front cash, the annuity provider will send you a monthly check for the rest of your (and your spouse's) life, however short or long that may be.

People don't buy annuities, according to the Brookings paper, for several reasons: they're too expensive, and potential customers are unfamiliar with them, biased against them, or too lazy to inform themselves. The solution: “[D]e­mand would increase and workers would be bet­ter off if market function improved and behavioral obstacles were circumvented or mitigated.” In circumvention of those pesky behavioral obstacles, the authors propose a sea change in 401(k) withdrawals that would see them automatically converted to two-year “trial” annuities, unless the retiree affirmatively opts out. At the end of the two-year period, the retiree would again have to affirmatively opt out in order to prevent the annuitization from becoming a lifetime commitment.

The current political climate, characterized in my view (as well as that of other eminently reasonable individuals) by corporate and executive branch gangsterism, would have us believe that we should make our own decisions regarding planning for retirement (i.e., privatize Social Security), until such time as we retire, when the pros will take over and relieve us of our funds as thoroughly, quickly, and automatically as possible. A default program such as that proposed by Brookings would provide a huge windfall for the corporate and Wall Street types who, for the past 30 years, have been busily sucking our nation's wealth up into the top one-tenth of one percent of the population.

Again, annuities are not evil, and they do offer a means—similar to Social Security benefits—of providing a dependable level of income over an unknown period of time. However, they are expensive (i.e., the lump-sum up-front purchase price does not currently translate into a very attractive monthly income, actuarially speaking). In other words, your peace of mind is bought at an unacceptably high price.

My alternative to the Brookings plan?: Let the greedy providers who are selling us these instruments look for less of a killing when they do so. How? Find a means to increase competition among providers, legislate for “plain English” prospectuses that don't require an MBA to understand; and then, perhaps, institute an opt-in plan for the automatic conversion of 401(k) payouts to trial annuities which this report describes.
tags: Retirement

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