Wednesday, July 14, 2010

Retirement Planning: ERBI Survey Suggests Plan Shortfalls

Should it come as a surprise that our retirement plans have not made us comfortable enough to suggest that we won't run out of money?

In the July 2010 EBRI Issue Brief, written by EBRI Research Director Jack VanDerhei and senior research associate Craig Copeland detail the travails of various cohorts in the pursuit of outliving your retirement nest-egg.

What they found was a "don't-feel-bad-for-yourself" moment we should all take note of: the rich can become less so in retirement, just like us. Okay, most of us have a greater chance of outliving our money as compared to the highest income brackets.  But the thought does have some comfort but few lessons.

The EBRI Retirement Readiness Rating™ is based on EBRI's Retirement Security Projection Model® (RSPM), which the institute first used in 2003 to evaluate national retirement income adequacy seeks to portray where we are in terms of retirement in the hope that we can make the changes we need to our plans (such as 401(k)s) while we are still working.  It is also designed to show advisers which steps to take to protect their clients.

The latest version of the survey includes auto-enrollment and auto-escalation of contributions in 401(k) plans, which have come as a result of changes on the legislative level.  It also includes updates for financial market performance and the often chaotic state of employee behavior.  The report is based on a database of 24 million 401(k) participants.

By simply looking at how much has already been accumulated across this wide swath of workers, they were able to determine when the money will run out.
The results after 10 years of retirement:
Lowest-income quartile: 41 percent are likely to run short of money.
Next-lowest quartile: 23 percent.
Third income quartile: 13 percent.
Highest-income quartile: 5 percent.
After 20 years of retirement:
Lowest-income quartile: 57 percent are likely to run short of money.
Next-lowest quartile: 44 percent.
Third quartile: 29 percent.
Highest-income quartile: 13 percent.
But what does "running short of money" actually mean?  The ERBI study used a combination of basic expenses based on information obtained from the Bureau of Labor Statistics' Consumer Expenditure Survey.  This also includes the biggest unknown but the highest projected retirement costs: health care.  By adding the cost of some health insurance and out-of-pocket health-related expenses, plus expenses from nursing home and home health care expenses, at least until the point they are picked up by Medicaid, the nest-egg most of us have will be under serious stress in a relatively short time.

While there have been some improvements in how much money we have currently accumulated, the group referred to as the early Boomers, those aged 56 to 62, the likelihood of running out of money has improved since the survey began.  But it still sees 46% of this group with less than adequate assets to cover the basic needs in retirement.  Late Boomers are only slightly better prepared with 44% likely to run short.

In short, we haven't put enough money to work for our plans to be successful.  We haven't allowed the plans to use the risk available to grow the plans the way they need to be nurtured.  And we have not harnessed our own budgets in such a way as to alleviate the pressures that accumulated debt takes away from our ability to save and invest more.

Monday, July 5, 2010

Without a Clue about Money, Retirement and Investing

By now, most of my regular readers know what I do not like in the world of financial products. The annuity galls me (a mix of insurance and mutual funds that doesn’t do either well), the ETF (which mimics the indexed mutual fund but allows you to trade it just like a stock and pay for the privilege of trading just like a stock) and any tool that gives you the impression that you can set it and forget it.  There are others, but at the top of that list is the target-date fund.
The products are all hyped and re-hyped by the those that sell them as the easiest way to wealth.  The belief that sales people from the world of finance care about your well-being or what is known as fiduciary responsibility, may be the biggest mistake the vast majority of us make.  And the folks who make these mistakes are often wary of every other type of sales approach in every other facit of their lives.
So why, when it comes to target date funds do they simply believe the following: pick a date in the future and our mutual fund manager will adjust and readjust the underlying holdings of the account to protect your hard earned money, so, that when you retire, you will have a conservative allocation of funds that will serve you well into the future?