Retirement – A Moving Target

retirement, financial planning, money management, savings, investment

Photo by Ava Lowery

Not all that long ago, most Americans lived in rural settings and relied on the land as their principal source of income. They cultivated crops and raised livestock, and their investments in real property, equipment, and animals supported them throughout their lives. They had many children, partly out of ignorance and partly to help with the labor. A collateral benefit of having numerous offspring was that a reasonable probability existed that at least one of the children would be willing to care for aging parents.
 
Then came a time when families moved to urban settings, and after an initial period of employer abuse, the companies for which the workers labored began to provide long-term pension benefits. Employees participated in defined-benefit plans that, upon retirement, would pay until death. Life spans were shorter, and many workers died within a few years of retiring. For the most part, retirement funds generated returns that were adequate to cover retirees’ needs.
 
As medical technology advanced and awareness of the importance of exercise and nutrition increased, life expectancies extended, putting pressure on defined-benefit pension plans. Many of these plans were inadequately funded and became like millstones around employers’ necks. In 1980, companies began to shift to defined-contribution-401(k) plans for employees’ retirements.
 
While these things were evolving, the United States government began, through the creation of the Traditional IRA in 1975 and the Roth IRA in 1997, to encourage people to save more. With the advent of the 401(k) and the IRA, the burden of managing retirement money shifted radically from the employer to the individual.
 
Superimposed on this is the Social-Security (SS) system, initiated by President Franklin D. Roosevelt in 1935 as part of the New Deal. It includes retirement, disability, survivorship, and death benefits and provides retirement coverage similar to that of traditional defined-benefit pension plans. Initially proposed as a paid-up benefit, some wrangling in Congress turned it into a pay-as-you-go program based on active workers’ footing the bill for retirees, with the expectation that future workers would in turn provide for them.
 
A disconnect exists between the erstwhile agriculturally based retirement scheme and the 401(k)-IRA-SS system adopted later. In the past, the only significant risk to long-term security came in times of war, depression, or low agricultural productivity that forced farmers to seek financing to cover operating costs. If hard times were not prolonged, the loans got paid, and things returned to normal. If they persisted, however, owners lost their properties, and families suffered. Completely eliminating risk is impossible, but the agriculturally based approach mostly assured folks that they would have the resources to make it to and through death.
 
Now, with the exception of Social Security, the retirement paradigm has shifted to defined-contribution plans. Individuals are charged with setting aside (in private investments, 401(k)s, or IRAs) enough to cover their retirement needs. Unfortunately, this is not accompanied by financial education that warns workers of the pitfalls of defined-contribution plans, and the result is that the retirement accounts of many folks who are nearing the quitting age are woefully inadequate.
 
Under the new retirement model, ordinary folks are dumped wholesale into a complex financial system to compete head to head with highly prepared, bright individuals on Wall Street. Going up against the world’s best-and-brightest financial managers is risky at best. Even mutual funds that limit market exposure include fees that are difficult for people with nominal financial skills to comprehend.
 
If we want long-term stability for retirement plans, the safety and predictability of self-managed 401(k)s and IRAs must improve. Even for savvy investors, the alternatives are too many and the risks attendant to working with financial planners, securities brokers, and fund managers too real.
 
We must make adjustments to our retirement model that will work over the long haul. Working for 40 years and retiring for 30 is unsustainable. Taxpayers will end up supporting those who are unsuccessful with their retirement planning. That tax burden will pass to our children and grandchildren, who at some point will experience a diminution of their lifestyle and a destabilization of their world.
 
The solution is multifaceted. First, we should parse the four social goals of our Social-Security system to achieve better transparency. Second, we should place further constraints on what can be done in an IRA account to eliminate risky investment vehicles. Third, we must require greater transparency regarding commissions, fees, and other transaction costs associated with mutual funds, index funds, and securities.
 
Fourth, we must further refine the power of the Securities and Exchange Commission to encourage transparency and fairness in the marketplace. Solid, long-term investment strategy for the masses should not require deep knowledge of finance. Folks should not need college degrees in order to manage their financial futures successfully.
 
Fifth, we must include in our schools the coursework (math, finance, life skills) necessary to prepare young people for the investment decisions they will make in a globalized world.
 
Under the present retirement-planning system, in order to accumulate sufficient assets and protect them, people have to know too much about finance, and their investment decisions have to be too right. Establishing a retirement model that is safe, fair, transparent, predictable, and practical for Americans with high-school educations is the least we can do to promote long-term financial stability in our society.

 
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2 comments… add one

  • kingsley June 8, 2012 at 10:34 am

    Your synopsis on retirement history is helpful, I have always wondered how we got ourselves into the current situation. The part about competing with the best of wall street is so true, and a lot of people have suffered because they are not financial investors. Although i am not retirement age, it is good to understand the total picture and learn from our history.

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  • JCL August 24, 2012 at 10:46 am

    “Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”

    This caveat has always been in the Social Security statements. To make it through retirement, we will need many streams of income. And in that respect, the times have never changed. What has changed is our expectation that there are guarantees — Social Security, 401k returns, economic prosperity, and so forth. But we need to all read the fine print, of our prospectuses as well as our Social Security statements. Engage brain, not emotions, ’cause reality can bite, and that man in the suit with the Presidential Seal doesn’t even know your name, though you have his on your back bumper.

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