+1
When I was 30, an employer put a small amount away in a balanced TIAA account. 35 years later, it has increased almost 30-fold.
I now wish that I had contributed to it. The money I invested starting in my 40s was too late to have done as well. You will learn to appreciate the power of compound interest and time.
I was also lucky in having co workers’ mistakes become valuable lessons for me.
There are employees starting their careers here in their fifties. A huge portion of their income goes to retirement accounts because eventually they won’t physically be able to do the job anymore- diabetes, high blood pressure, etc can force them to medically retire. I have a lot more time to save, but since I can afford to save I’m doing it now.
Another advantage I have is relative youth. A driver with less seniority than me in his fifties is probably going to be “behind” me his whole career. I’ll get to pick my vacation dates and work schedule before him, giving me more chances to spend leisure time with my family and a better work schedule (with better opportunities for overtime, which means more income). Most of the high seniority people are also in their fifties and within a decade I’ll be the “old timer” at my job even though the newbies might be old enough to be my parents. Ironic thing is this job is great for someone young (good pay, benefits, job security) but I guess when you live in Silicon Valley driving a bus isn’t as glamorous for Millennials as say programming apps or something. I’m an outlier; most of our hires are older guys humble enough not to mind that their collars started turning blue over years of underemployment.
It’s really the same thing.
There are so many problems with the current retirement system it’s hard to know where to begin.
First, it’s not really surprising that people don’t save as much for retirement as they should - they’ve been told for decades that the government has their back and is going to provide for them. This is one of the little-discussed but very important aspects of public retirement policy - if government benefits simply displace private savings, you’re not really improving the lives of people, but you are putting them all into the same risk pool - if the government mismanages its finances, the system has no resiliency since private citizens have no savings of their own to fall back on. And that’s exactly what’s happening today. The government has over-promised, and as a result it’s going to leave a lot of people in a world of hurt.
But aside from the public policy issue, there are two major problems facing middle-aged people today. One is that many people had used their homes as their retirement savings plan - you pay off your house, then when you retire you sell it, bank the money, and move into an apartment. Unfortunately, the real-estate collapse wiped out a lot of that value.
The other problem is that we are now in a zero interest rate regime, and will likely stay there or very close to it for a long time. People who planned their retirement savings based on the notion that they would get the historical 5-7% per annum interest rate compounded over decades are going to be hit very hard - especially when that loss of interest income is hitting right when it’s needed the most - in the decade before the bulk of the baby boom retires. So even people who thought they were saving responsibly are going to find their retirement years pretty lean.
The third problem is the large group of public sector employees who have overly-generous retirement benefits that are bankrupting state and local governments. I predict this is going to lead to increasing tension, even in ‘liberal’ regions as people living in retirement in near poverty realize that their own government services and benefits are being cut dramatically to support a much higher lifestyle for other people. A number of cities in California are facing this now, and even their Democrat mayors and councils are waking up to the fundamental injustice of taxing poor people or cutting their services to pay 70% retirement wages to people making two or three times the national average income, or forcing people to work until they are 75 to support the retirement benefits of people who managed to retire when they were 58.
On the good side, living frugally is getting easier. I think I could be quite happy in a tiny apartment, so long as I had a good high-speed internet connection, a decent computer, and perhaps some VR hardware (which I think will be ubiquitous in 10 years). The wonderful thing about living online is that you can be a full participant in society even if you’re completely infirm. So long as you have your mental faculties, you can lead a rich life - even from a retirement home.
We may wind up sheltering a lot of retirees in tiny cubic homes because our finances go bust, but that kind of lifestyle won’t be nearly so bad in the future. I could see myself even choosing that lifestyle voluntarily, even if I have saved enough for a more lavish retirement.
Really? From here
Doesn’t sound like a bunch of people convinced that the government is going to take care of them to me. People my age who have more confidence have known exactly how much we can expect for years (we get a statement every two years) and so anyone thinking Social Security is going to let you live in luxury has only themselves to blame. They’ve also seen how much their retired parents get.
But aside from the public policy issue, there are two major problems facing middle-aged people today. One is that many people had used their homes as their retirement savings plan - you pay off your house, then when you retire you sell it, bank the money, and move into an apartment. Unfortunately, the real-estate collapse wiped out a lot of that value.
I don’t know anybody in any reasonably paying job who doesn’t save for retirement in one way or another because of social security. In the old days it was pensions, today it is 401Ks. If you think that someone in a lower income level would take the 50% of the money being put into SS for their retirement now they’d get back and save it (I doubt they’d get employer contributions) and never touch it, you are quite naive. Without SS a lot of these people would have nothing or almost nothing to retire on.
As long as I can remember low interest rates were a problem - except for the high inflation '80s, when cost of living increases on fixed incomes was a problem. There is far wider ownership of equities than there was. I’d have to see how 401Ks are distributed, but I doubt they are heavily biased towards interest bearing products. Plus along with low interest rates we have very low inflation, which is usually considered good for the retired.
This is a real problem at least - made worse by governments who underfunded pensions to keep tax rates down. But it is a relatively small problem.
And you don’t mention the bigger problem of a good retirement today requiring much higher levels of investment skills than in in the past. In my father’s generation - and mine when I started to work - your company had a pension which with social security gave you a reasonably good retirement. Today you need to take money away from your current income to save. Great deal if you have a good enough job to have an employer who does matching and if you have enough money that you can both save and eat. Plus you can’t screw up. Look at all the people who panicked and sold at the bottom. Then there were people who would have wanted to start retirement at the time of the crash, but found that if they did so they’d have to sell at the bottom. Plus stagnant wages mean that there are more people squeezing by and worrying about today, not thirty years from today.
Social security has been running so long, including during the '50s and '60s, that you can hardly blame government. What is new is defined contribution plans. They’d work if we had a population of homo economicus - we don’t.
When in my 20s, I worked for a leading Silicon Valley non-profit research institute with a bunch of Really Smart Guys. More PhDs per acre than you can imagine.
There was an extremely vocal group trying to convince management of the institute to drop out of SS because it would not exist when they retired.
Most if those guys have been retired for ten to twenty years, collecting their SS checks every month.
I think the millennials are making the same mistake.
In my case I learn end how repair machinery at a relatively young age,so unless I go blind, I’ll have a lucrative career until my death if I’m forced to work that long. While it would have been better to have saved more money when I was younger,events and stupidity conspired against me and it didn’t happen
C’est la vie.
Even if people didn’t save enough it’s not likely that the government is going to allow them to starve. Despite all of the “doom and gloom” pronouncements, the US is still the richest nation in the world and will remain so as China’s staggering population will never allow the majority of its people to ever achieve anything remotely like American middle class.
The SS tax that people pay will simply increase to meet the needs of the system or the DoD will be find that its funding is decreased to more practical levels and the money will be diverted to social programs. Or both.
SS will exist, but it will have to cut its benefits by something like 20% a few decades from now if the system is not fixed. However the system will still exist, instead of getting $1500 a month a person will get $1200. Millennials are facing a world of higher debt (both public and private), fewer jobs, crappier jobs, fewer government benefits, higher taxes, etc. Its going to be a rough 40 years economically. At least the phones are better. Nyan cat makes up for the hollowing out of the middle class.
The real threat to SS is people who want to demolish it for ideological reasons. I thought the battles over things like the minimum wage, social security, medicare, contraception, etc. were settled 50 years ago. Nope.
My goal is about 10x my annual expenses I plan to have in retirement saved up, combined with SS. I hope that’ll be enough.
I’m fifty-seven. The year I turned fifty-two, I got the first job I ever had which paid me enough to contribute to a retirement savings plan. So I’ve been contributing to it, and getting matching funds from my employer.
I figure I’ll work at this position for about fifty years; by then I should have enough to see me through.
We’re not really talking about millenials here, we’re talking about the boomers - Those people who are at most 15 years away from retirement. Millenials have a completely different set of problems facing them, and in any event we don’t know a lot about their savings strategy, since they’re too young to have saved anything yet.
I didn’t say social security would let them live in luxury - I said that government provided benefits displace private savings. If you don’t think that’s true, let me ask you - do you think you might have saved more on your own if you knew there was no social security? Or did you factor the social security payments into your retirement plan, and save enough to give you the lifestyle you want which includes your social security payment? Since you seem like a smart investor, I’m guessing the latter. That’s what I do, too. I know that my Canada Pension will be X, and I need X+Y to live comfortably, so my savings plan is all about the ‘Y’. If there was no Canada Pension, I’d have to save more.
The risk comes when you find out that you made these plans, and suddenly the benefit you were counting on isn’t there.
But to be honest, I don’t think that’s much of a risk, for you or for me. Canada’s pension system is fully funded, and America’s isn’t really that bad off either. The killer is health care. Old people are going to consume more and more of it, and that money has to come from somewhere and it won’t be the fixed incomes of retirees. Gen X and Gen Y are going to get it in the teeth - especially since the old people they’ll be paying the health care for will include the boomers, and they have a huge amount of financial and political power.
Really? The savings rate says otherwise. But again, even people who save would save even more if it weren’t for social security. Now, I’m not advocating getting rid of social security - I’m just pointing out one of the side effects.
I never said anything of the sort. But certainly many people would save more for their own retirement if social security wasn’t there. But it’s more than that - if you look at what an historical ‘safety net’ looked like, it wasn’t just about saving money. It was about having more children, maintaining close contact with your extended family, etc. Grandparents move in with their children or are financially helped by them.
This is one valid criticism social conservatives have - public charity and assistance displaces private charity and assistance, and helped to break down the family because it lessened the need for strong families. I fully understand that this could never work for everyone - especially in the modern era which requires a certain amount of labor mobility. The large family unit was in big trouble anyway, and that left a social gap that government helped fill. But it’s also true that the existence of public benefits help erode the evolved social structures that provided safety and security for many in times past.
Absolutely true. I do believe we need social safety nets, including a retirement system. I don’t see how we could survive as a society without it. But we always have to consider the potential negative effects when designing these programs. My viewpoint is that we need to find a balance between making sure people are cared for when in need, while minimizing the ‘footprint’ of government services on the structure of society, as government aid is inferior to people looking after each other when possible. I’m not saying it’s easy finding that balance, but you never will if you don’t acknowledge that public benefits, no matter how good and necessary they are, also carry with them social costs.
Really? You’re older than me, and I can remember that most of my life people felt that they would earn at least 5-7% on their money.
Have a look at this table - especially the averages listed at the bottom. From 1964 to 2013, the arithmetic average annual return on safe T-Bills was 6.97%. If you invested in the S&P 500, your average return was 11.29%.
Do you think people are going to get those kinds of returns going into the future?
Since we’re talking about people nearing retirement, their investment portfolios should be weighted more towards income-earning, safer investments and away from equities. Anyone investing a major portion of their retirement saving in equities just a few years ahead of retirement runs a big risk of a bear market destroying their retirement plan.
Many people invested amounts that they thought would allow them to live off of annual interest. A $500,000 nest egg parked in T-Bills would have historically earned you about $35,000 per year in interest in retirement. Add in your Social Security, and you’d be set pretty well for a comfortable retirement income that could last essentially forever. Even if 2% inflation eats away at the real value of your nest egg you could still take out maybe $25,000 per year and leave the rest in to build up your principle against inflation. Couple that with $20,000 from Social Security, and that’s a decent retirement for a middle class person.
Now take that $500,000, eat away at it with 3% inflation, and have your T-bills only earn 1%. The situation is entirely different.
Not really true. The CPI numbers are held back by things that don’t help near-retirees, or even hurts them. In the meantime, the things that really matter to them, such as food, are experiencing rather high inflation.
Tell that to the former residents of Detroit or the ones that remain in the dark because the city can’t afford street lights. Or tell that to the current residents of Stockton California or other California cities that have already declared bankruptcy largely because of unsustainable public pensions. It may not be a large federal problem, but for people in cities with these overly-generous pensions it’s a big, big issue.
I don’t know… My company recently switched from Defined Benefit to Defined Contribution plans, and for most people it looked like a fairly straightforward transition - if your company has good pension managers, they can shepherd employees through it.
I do agree though that planning for retirement is trickier than it used to be. Not just because of what you mentioned, but also because the world is changing faster and is more volatile. It’s hard to even picture was a retirement will look like in 20 years, let alone how much money you need for it or what you need to do to ensure that you have it.
I’ll take retirement when the blade runners find me.
That actually happened to a fair number of Boomers - they thought they were making good decisions only to have a chunk of capital wiped out with the Great Recession.
That’s one of the flaws of throwing retirement planning onto the individual - as a general rule, most people aren’t financial experts, they aren’t investment experts, and they make mistakes/bad decisions from time to time.
I doubt that. Particularly for those under the median income.
Just ignore the problems of elder abuse, or folks like my in-laws with a long history of having the elderly move in with the children then stripping the elderly of all assets, leaving them alone and neglected in a back room. You’re assuming all extended families are benevolent. They aren’t. One of the benefits of social security was giving the elderly an option besides being at the mercy of relatives who might or might not have had their best interests in mind. It’s not just about labor mobility, it’s also because some families are toxic.
You also have to acknowledge that having “the family” do it isn’t always ideal. Some people don’t have family. Some extended families are too dysfunctional - and that happened long before the New Deal. Some families are exploitative, abuse pieces of crap.
And yet… people have been known to do just that.
See, that’s one of the problems - there are a lot of financial idiots out there. Having SS as a fallback ensures a floor they won’t fall below.
And many simply were not able to do that - either due to low-paying jobs, or extended periods of unemployment, or in the US, medical bills that wiped out their savings.
Oh, please - the problems of “former residents of Detroit”, or the current ones (as there are still people living in that city) are not solely due to high pensions, far from it. It went down the crapper due to other reasons long before their pension crisis hit.
Yes IF your company has a good pension manager, or 401(k) manager - what if your company doesn’t? I worked for a major corporation once where the fund manager screwed up and everyone invested in the 401(k) lost significant capital. Where the employee can choose the asset allocation they employee often makes poor decisions - going for high risk investments too near to retirement, or investing too conservatively when retirement is far away.
Most people are not financial experts, and it shows.
Which is why my primary strategy has been to stay as healthy as possible as long as possible so I can work as long as possible - if things work out and I can retire earlier than that, great, but if not I am at least able to work if I have to. Of course, that plan isn’t bullet-proof, either. Nothing is.
But we’ve heard the same doom and gloom that they have. Being close to retirement and seeing our statements might mean we are smart enough to ignore the doomsayers, but I don’t think anyone with a pulse who has been listening to the news the past 20 years would think that government will just take care of them, no risk.
If you are considering “private savings” as a totally separate category, then no SS would increase private savings. If you consider retirement savings as a whole, I am pretty certain that savings would in fact decrease. The SS tax is fairly regressive - do you think those on the bottom or in the middle would always save at least as much as now taken? And would employers continue to match this, though anyone cutting back would get a competitive advantage?
I’m well over the cap, and have enough surplus so I can target a percentage of my income to save, which does not count the SS contribution. If I converted that to private savings, would I increase the percentage significantly to compensate? Maybe. Would I if I were barely making it? Doubtful.
It would be interesting to compare total pension contributions (private, not SS) with 401K contributions including matches. Given the problems we’re talking about here I doubt we are ahead - except for high income people. And we always win.
Which happens in a variety of situations, including underfunded private pension plans and market busts.
That’s a different discussion. In the US we have the advantage of having so much room to improve, since today we do such a miserable job of managing costs.
I said because of Social Security. There are plenty of people who don’t save because they either don’t have the cushion to let them save or are so into immediate material needs and wants that they don’t save. That’s different from not saving because the SS check will let them hit the beach. Do you think those people would pump their SS money into savings or into another piece if iCrap?
Like I said, only if you don’t count SS as retirement savings. Today, thanks to the stagnation of salaries, grandparents are helping the grandkids more than the other way around. I agree that we will see more multigenerational living arrangements. My wife’s aunt lived with her parents, and they had two income earners and one stay at home parent, and it worked out quite well.
Everything has a cost. But when we measure costs versus benefits, we need to to it in the real world, not an idealized world of perfect individual responsibility. We also need to protect outliers. I know people who get great returns from private investing, and who would do much better if they had the money now going into SS. But there are more people who would screw it up. You have to consider the worst case, not the average.
The passbook savings rates I got in the '50s were 3 - 4%. My father’s mortgage from 1951 was about 3% - lower than I’d ever seen in my life until recently. Inflation rates in the '50s and early '60s were very low - I can measure this in time between increases in the cover prices of sf magazines. They were 35 cents for the entire decade of the '50s. So savings rates couldn’t be expected to outpace inflation by that much.
Sure, when we get away from this very unnatural 0% fed rate stuff. Though we don’t want the kind of returns we got in the early '80s because of high inflation. I financed the guy who bought my house in 1980 at 12.5% and he was glad to get it. That leads to other problems.
I’ve seen some articles recently giving other advice. For instance, keep your growing equities and sell them off at highs to live on, and only depend on more traditional returns if the market goes down. I think we’re way past dumping all your assets into fixed income securities. I’ve got some nice dividend funds myself, but not everyone can afford to get into those.
While those things gave good income streams, high returns are tied to high inflation, and those funds don’t keep up. You don’t hear complaints about inflation eating into fixed income returns any more - just that the returns are not good enough. The problem is lack of stability, and I agree that this is the key.
Not if you make 3% and inflation is 6%.
I lived through 10% inflation. Food is high due to some factors, though being selective helps. The retired are a bit less affected by energy prices. Our inflation is still quite low compared to the rest of my adult life.
We’re talking an entire generation, so this is still small. We saw similar things happen with private pensions. I’m sure we’ll move to the defined contribution model for public pensions also, and the problem in this thread will get worse.
The mechanics are easy. You right remember that thanks to the work of Thaler and others we changed the law so that 401K participation became the default, which led to many more people choosing the plan. Which is a no brainer which anyone who is rational would have done no matter what the default was. However they found that to keep from defaulting too much money from paychecks they set the default contribution amount low, like 2% - and total contributions actually went down, as people accepted the default.
If you did a poll here asking if maximizing 401K matching is a good idea or not, assuming you have the money, you’d get near 100% agreement regardless of political or social position. But that isn’t the way it works in the real world.
And I totally agree with you about volatility.
I was thinking best case. But in terms of financial strategy, there can still be lots of problems with defined contributions. Some companies allow or even encourage an option to invest in company stock, which is really a bad move. Lots of companies have only very limited investment options. And some of the options are not as good as they sound. There are these retirement targeted funds that supposedly rebalance themselves as you get closer to your retirement age. But it turns out they have very high fees, and if you have enough options to be able to balance your portfolio you wind up with something good for the average, not for you. And all this is assuming a big and competent company managing them.
Fees can be a big drawback for defined contribution or self-directed retirement plans - but adopting a low fee / index fund approach is easy.
I kept my 401k fees at about 0.6% and then rolled it into a plan where I drove the fees down to 0.1%.
For those just starting their careers - please take a look at this article Every 25-year-old in America Should See this Chart.
You “kept” your 401k fees at a level that is not available to many.
Agreed, I had some good index fund options but the concept holds.
Keep an eye on fees.
OP and some of the responses here seem bizarre.
Some old people are rich, some will be supported by children, some will squeak by on Social Security, some will go hungry. Is there something novel or unexpected here?
(BTW, I’ve taken a fifth option – retiring to a country with lower cost of living. So don’t blame me; I won’t have Medicare so won’t be stealing from Generation X, Y or Zed.)
I think your point is that if a major medical problem will cost $X out-of-pocket, where $X is whatever your life savings is, many people have a financial incentive to eat, drink, make merry, and minimize $X.
That’s a good point. The solution is government-funded health care, though that seems to be the very “problem” those you argue against are complaining about. :smack:
As I said, I find the posts in this thread bizarre. I assume all of davida03801’s rhetoric is directed against Medicare specifically. If that’s underfunded, it’s because taxes are too low, not that they’re too high. Health-care costs are too high, but that’s a topic for a different thread. The people who complain about government health-care often direct their venom at Obama’s Death Panels, but they’d be the perfect “solution” for the problem addressed in the bizarre posts here. 
It’s bizarre that American discourse degrades into pitting one generation against another. Is this, like race vs race, something promulgated on behalf of a right-wing agenda?
[Septimus raises hand wistfully.]
How do you “select” 401(k) fees? My 401(k) provider is chosen by my employer.
The fees on each fund in your plan will be different. You have to factor that into your fund selection.
Index funds will be the lowest. If your plan does not have index funds, start asking for some to be included.