I think the folks who bought our house in 2012 got a great deal, considering all the money we put into it.
I was dismayed to learn that, while you might have to pay capital gains taxes on a home’s appreciation, you can’t claim capital losses when you sell at a loss.
Dollar cost averaging, with automatic rebalances every quarter, has been a big winner for us.
I will use this quote for the rest of my life
Yeah, the issue is if one happens just as you retire (unless you have your retirement massively overfunded). The pandemic crashed panicked my wife, but between me and our financial advisor we managed to not doing anything massively stupid (we do now have an overly large cash position, but her peace of mind makes it worthwhile)
That’s right. Many people who kept their homes had to drain their savings.
~Max
When I wrote the above, I sent it to a number of people to get their thoughts as well, waiting for their responses before I returned to the thread. Sorry for the delay!
A couple of the non-SDMB responses were similar to my sister’s, who asked “So what about the ones who did have life insurance/401(k)’s, etc.? How are they doing?”
And I realized I made the fundamental punditry error of taking what I know to be “of course”, finding a few stories which corresponded to this background knowledge… but with a new angle… and wrote the above with the “of course” taken out, focusing only on the angle.
Of course.
So, let’s right this wrong quickly.
How are Americans doing when it comes to owning life insurance?
Poorly.
Many would cite how 54% of Americans are covered by life insurance as an example of systemic failure. But that doesn’t give us any idea as to the quality of the insurance coverage, i.e., how big the check is going to be when the insured passes away. And 54% of Americans could cover 100% of households. Unlikely, but possible.
No, to find the failure, you have to dig deeper.
Following is a chart about how the claims for life insurance and annuity products were processed from 2016-2020. My apologies for the cropping – I couldn’t resize the embedded chart so that everything would appear on the screen. For purposes of this, we’re focused on line 1 “Death Benefits” and line 6 “Surrender benefits, withdrawals for life contracts”:
The number of deaths in 2020 according to CDC: 3,358,814.
Total Death Benefits (DB, line 1 above) paid in 2020: $87,670,442,000
Average DB: $26,101.60
Obviously, the argument goes, not everyone who dies ‘needs’ a life insurance policy… and that’s true if your surviving decision maker (spouse, estate executor) has enough ready cash available to handle the immediate expenses of death in America. (Many will argue children don’t need life insurance, to which I want to know who is giving out free child funerals, but I digress…)
So, going with the LIMRA data above, we learned that 54% of that 3.3M dead did have life insurance, meaning the average payout for a life insurance policy was only $48,335.
Which is enough to bury someone, definitely, and pay off their medical expenses (hopefully), but it really leaves nothing for the survivors.
People actually cashed out 3x as much money ($323B in 2020) from their whole life insurance policies and annuities as was paid out in death benefits for all life insurance policies ($87B). Which is a fact which really makes me want to digress into a sidebar about how wealthy and corrupt people use whole life insurance, but like I said… short. And I’m already at 400 words.
But I think we can conclude that the odds are pretty good that even if there was life insurance, it surely wasn’t the 10-15 years income recommended by the experts who sell it. (Like me, at one time.) No, the average death benefit was about $50,000, and that went only to the beneficiaries of the 54% who had coverage, with the other 46% having no life insurance coverage at all.
CONCLUSION: Given the industry itself recommends 10-15 years of term coverage for a young family, an average death benefit of $26,000 per dead American and $50k per covered American represents a colossal failure.
401(k)’s and IRA’s: Defined Contribution Plans
OK, so the average person doesn’t have a lot of life insurance. So what about their retirement savings? How is the 401(k)/IRA systems holding up? After all, starting with Reagan America has radically transformed how we handle the funding of retirement – from experts guiding the decisions based upon what they will have to pay out in 30 years to individuals guiding the decisions based upon what they want to come out of their paycheck today.
And this transformation, saving corporations trillions over the past 40 years, has led to this change:
This change is literally applied ‘free market, individual choice’ conservative ideology, guys. So… how’s that working for us?
First, let’s find out via the Federal Reserve how many participate in retirement plans (PDF):
26% don’t have a retirement plan.
54% have a 401(k) (or similar)
33% have an IRA
22% have a defined benefit pension
22% in miscellaneous: 14% in real estate, 7% have a business, 1% other.
(BTW, many researching on their own will find charts showing 70%+ 401(k) participation instead of the 54% figure I cited above. That’s the difference between “eligible employees” and “all employees”. My 54% includes those employees who are not eligible for a 401(k) either due to job status or the fact their company doesn’t offer a retirement program.)
Obviously the 26% is a huge problem, but lets see what we can find out about the account sizes of the 401(k) and IRA group:
Fortunately for us, Vanguard publishes an annual report called How America Saves (PDF). Fortunately for me, many analysts have already crunched the numbers showing us the reality of the defined contribution retirement system.
The second cite shows a chart by which people are sold the benefits of the 401(k) (the power of compound interest, y’all!), displayed here for your amusement. This chart assumes you start at age 22 and put the maximum of $19,500 annually in your 401(k), no matching company contribution.
Looks great!
But the reality for the 54%?
The best summary I have seen regarding this, very accessible for the layman, comes from Boston College’s Center for Retirement Studies, their October 2020 update on 401(k)/IRA holdings (PDF). In this small report, two charts stick out like a sore thumb.
The first is median 401(k)/401(k)+IRA holdings for working individuals, by age range, shown above and repeated below:
The second is median 401(k)/401(k)+IRA holdings for working individuals aged 55-64, by income quintile:
If you have read your retirement advice books/websites, you likely have heard that you want to take out about 4% of your total account value as income, if you do not want to disturb the principal.
And even for that 80%er in the chart above, the one with a $289k account balance, I have to wonder… is $11,560/year in income going to be enough? That’s a $1,000 a month, possibly smaller than the social security check.
To those earning in the top 80% of income, I ask: Was it worth giving up your defined benefit pension for a lousy $1k/month in 401(k) earnings?
Sam, we talked about how the financialization of America has cost the average American $42,000 in annual income… now I have to figure out how much this cost us in retirement income as well. Dammit.
Anyway, to my sisters question of how the system is working for those taking horse dewormer AND who have bought into this, the answers are:
According to industry numbers, if a person has life insurance, their policy is likely around $50,000 in benefits. So the life insurance industry is failing America.
According to industry numbers, if a person has a 401(k)/IRA, their 401(k) has around $144,000 in assets (median), providing them with $6k a year in income. That, too, is an epic failure of the system and its goals.
Well, a failure of the industry to sell to their recommendation. I’m not going to take the industry’s word for how much coverage some needs, although the $50,000 per covered person seems low.
I realize those are back of the envelope calculations, but some critiques:
So, just FYI, very wealthy people cash out (really, they take loans on it) whole life policies because doing so is a means of avoiding taxes. Whole life policies are also fantastic vehicles for money laundering.
But I repeat myself.
ETA: Sorry, had a bit of a defense of insurance, decided to remove it as I don’t really want this thread to devolve into a ‘how to plan for retirement’ discussion - we have enough of those.
What this thread is about is ‘is the financial sector failing those who believe in it the most, and if so, why?’
Mathematically, there’s an optimal way to live. You should eat a specific diet, you should sleep a specific number of hours every day, you should spend your free time learning new things and improving your health. You should save, invest, and spend according to a min-maxed algorithm that takes into account a variety of risks and likelihoods. And so on.
I’d suggest that there’s not a single person in the planet who lives that optimal life. But, if there was, does that person have the right to demand that everyone else do so as well? What powers of force does he have access to, to enforce this demand?
In general, the argument that he shouldn’t have this right would come from the idea that all of those other individuals are harming no person but themselves but that’s certainly untrue. We could calculate the economic harms that come to our perfect human from the less than optimal choices of all others. He is being harmed by their choices.
But clearly this scenario is ridiculous. There is no expectation that everyone is perfect. We live in a country that promotes and encourages diversity and individualism. A world of people who all live according to optimized formulas, based on the output of rigorous math and scientific results would be a world of clones, indistinguishable and all doing the same thing.
Why bother even having all those people, if they are all effectively the same person?
The cost of diversity and individualism is, necessarily, a large glut of suboptimal choices.
That those choices lead to poor outcomes is to be expected. It’s a feature, not a bug. We pay that cost in exchange for living in a land of diversity and curiosity.
Yes, indeed. The human brain prioritizes current risk/reward over much more serious dangers even a few weeks from now. This explains, for instance, why people confess to crimes they didn’t actually commit. They prioritize ending the psychological discomfort of an interrogation over the more permanent consequences of the legal system. Conversely, it also explains why some Japanese cities didn’t build a bigger tsunami wall before 2011, or why Galveston didn’t build a bigger wall before 1900. And it almost certainly explains our awful response to global climate change
Thanks for this. I have some questions the answers to which you may have come across in your reading.
First, did they say why the bottom 80% saw a drop in investment value from 2016 to 2019? The market went up in general so that isn’t it. Did these people get laid off and then had to dip into retirement savings? Did they transfer to jobs without 401Ks?
Second, is there any information on balances at above age 65? I was kind of expecting that when I retired I’d see fellow geezers be willing to work for me for cheap. I know one person who I suspect has awful savings who has just taken a job as a greeter at WalMart. Are people with low balances working? Are they drawing down their balances so that they’ll be fine assuming they die early enough? Or have the reduced their expenditures to be able to make do with Social Security and small withdrawals? It seems lots of people start Social Security long before 66, so that might be a possibility.
Your data confirms the fear that a lot of people had about the retirement situation, but I’m curious as to what the reality is. I haven’t seen that much about it yet.
JohnT Defined-Benefit pensions are only good if you can get one. Most people never got one. Who is going to pay mine? The first company I worked for, which no longer exists? The next, which I worked for several years? My current one, which I can’t count on existing in the future? It’s all well and good to handwave it by claiming that they should just contribute to a separate pension fund, but in practice that’s very similar to letting me pay into investments personally. Which I have the opportunity to do, and have done, and continue to do.
The people in the lowest earnings categories would probably never have had a pension to begin with; Defined-Contribution plans them start putting money in at any time. And that isn’t the only form of savings people can have, of course.
This is ridiculous. When we were in the time of defined benefit plans people made just as many suboptimal choices as today. The impact was less.
Plus, there is no requirement that choices be optimal. There is a wide range of suboptimality that still results in having adequate resources for retirement. For instance, we can’t make an optimal choice about when to start getting Social Security because we don’t know when we are going to die. Being off by a year or so won’t have that big an impact.
But the worst thing is that you seem to be blaming the problem 100% on the choices of those affected by it. If you get laid off during a recession and have to draw down your investment resources to live or avoid losing your home, is that a bad choice?
We know that people make irrational economic decisions - that has been demonstrated experimentally. Systems that ignore this are going to have many bad results, systems assuming people will behave even close to optimally are going to be inherently broken. Systems assuming that people who are working two jobs to pay the rent and grocery bill are going to have money to invest near optimally are broken also.
Investment alternatives have gotten more complex, which may be good. Remember, Alan Greenspan didn’t know what was going on before the 2008 crash, if he didn’t, how do you expect someone who barely got out of high school to do it? Not to mention even people who do invest might not have a lot of good alternatives open to them.
My first 401K when I was at Bell Labs had only two options, AT&T stock and a general portfolio. I foolishly invested in these 50-50. It turns out that when I left the AT&T stock had outperformed the other option, so I won. However I knew someone who was encouraged by IBM to invest in their stock. He got laid off at the same time as the stock crashed, so not as lucky as me.
Now lots of 401Ks don’t let you invest in company stock, to keep people from making bad decisions. I trust that I don’t have to say why this is a bad move.
The goal here, which our system is not meeting, is to let each and every person who at least tries to think about the future to have a decent retirement - even if they don’t make perfect choices.
Yet another reason why the investment option idea for Social Security that Bush was pushing was an awful idea.
You did notice that his numbers showed that 88% of people with plans in 1983 had defined benefit plans, right? It is true that the government let lots of companies underinvest in pension plans, but that doesn’t mean they are inherently bad.
I had a pension with AT&T, it stayed available despite the trivestiture and several mergers. I cashed out and bought an annuity for various reasons, but it stayed available. And grew reasonably too.
The data shows that while they can theoretically put money in they don’t, either because their company doesn’t offer it or because they don’t have a surplus to invest. So it isn’t working in practice, is it?
Now the old style pensions were not perfect - they screwed people who changed jobs fairly frequently as is common today, and didn’t help freelancers and consultants. IRAs and SEPs are big improvements from them. But I don’t think that we are in a better place in general than we were 40 years ago.
Consumer Reports has always recommended Term life insurance while you’re raising your kids, until they’re grown and the house is pretty much paid for, and then dropping it.
There’s little reason to have life insurance after that point. And the odds of you dying before that point are pretty slim.
Most people who had plans had those types of plans. A minority ever had those plans at all.
It’s simple: most people are idiots, and people who aren’t idiots (or as much of one) would rather help themselves to the idiots’ money rather than letting them keep it.
Nope. 60% had them in the 1980s.
Source: Just how common are defined benefit plans? - Ultimate Guide to Retirement
I’m not going to say that CNN is lying - but I would like to see where they got the information from. If the original information was that 60% of workers at companies with more than 2500 employees had access to defined benefit plans in 1980, I’ll believe it. 60% of all workers I’m not so sure about - too many people worked at small companies that were unlikely to provide a defined benefit plan to all their employees. It was probably at least 30-40 % of workers in small companies in the 80s.
Recall when dealing with time series like this that the bottom 80% in 2016 aren’t the same people as the bottom 80% in 2019. I don’t think DOL has published 2019 numbers yet, but 2016-2018 the number of active participants increased by 3.2M (4.8%); the civilian labor force increased only 2.7M (1.7%), and that’s in excess of the >4M boomers who retired and were replaced. So even if there were no change to the balances of each individual, simple demographic changes would lead to a decrease in average balance.
I’m not attempting to point a rosy picture, just a complicated one.