Your Retirement, Your Estimations

I understand that it is difficult to sum up all of the issues facing our quest for retirement, from our biases to having to participate in a market that seems almost impossible to embrace. So for the sake of this discussion: Here's the problem facing Baby Boomers. 

Paul Barnes wrote in 1987 that the reason ratios (percentages are used ) is a mathematical one "and is basically used to facilitate comparison by adjusting for size".  What he quickly pointed out was that their use is "only good if the ratios possess the appropriate statistical properties for handling and summarizing the data". It is why, when the information culled from a recent Wells Fargo survey expressed as a percentage, that 25% of the adult population would need to work into their eighties, a postponement of retirement that has become newsworthy of late. The survey even suggested that they accepted the fact.

Now we have always been barraged with percentages: 10% off this, we are the 99%ers that, the markets down such-and-such a percentage for month, the quarter, the year. Whatever it is, it blurs some distinct realities by ignoring, as Mr. Barnes suggested, some important data. And we don't need to go far beyond our own observations to find the underlying reasons why some people (25% evidently) are not retiring historically.

Let's start with the unemployment rate. Expressed as a percentage, perhaps because of the space needed to write such a large number over and over, it is hovering at 8.6%, give or take a re-estimate or revision. And quickly you will be told that to add in the disparaged worker, the underemployed person or even the fully employed person who is getting less and the percentage of people who will not be able to retire based on the typical timeline of a thirty year or even forty year career this number becomes almost impossible to calculate. Estimates push the real unemployment rate to around 14%. If you are older and long past the benefit-of-time growing your savings and a stat in this group, the trouble with these numbers can be even more devastating.

Let's from there move towards the participation rate in 401(k) plans. Or better, how about we look at the number of 401(k) plans there are, which is less than 50% of the workplaces. And that is only for those who don't have access to a 401(k). those percentages get worse when you consider that more than half of this group doesn't do a single thing to prepare for retirement.

And what about the folks that do have a 401(k)? Participation rates are up in some surveys, down in others. Chances are, if you were just hired, you were auto-enrolled in your company's plan. Recent numbers suggest that 90% of those newly hired chose to not opt out. While that is a headline number, the 10% who chose not to participate is more worrisome and adds to the quarter who will not have enough for retirement - although they may not be old enough to embrace the full consequence of that decision. But even auto-enrollment has its problems as two-thirds of those who are automatically enrolled don't do anything to adjust the default investment the plan picked.

Pamela Hess, director of retirement research at Hewitt Associates suggests that "Most employees who are automatically enrolled tend to stick with the employer-provided default contribution rate, so simply getting them into the 401(k) plan at a minimal contribution rate isn't going to help them meet their long-term retirement needs." That minimal contribution rate is often 3% and not close to adequate. In fact, in the larger picture, less that sixty percent of those who are in a plan contribute more than 5% of their pre-tax pay.

Ms. Hess believes that  "Companies should strongly consider increasing the default contribution rate and coupling automatic enrollment with contribution escalation, which automatically increases employee contributions to the 401(k) plan and helps get them to a better savings rate over time." Auto-escalation has helped, a method of putting some or all of the employee's raises into the plan but unless the worker understands the implications of failing to do so, they often don't opt for this benefit.

I have pointed out before that the recovery will need jobs that people want to stay in long enough to benefit from the company match. As much lip service as these plans offer when they match the contribution, vesting is still an issue. Some workers may be deciding to not stay long enough to get the matched contribution, a period that usually last five years and decide to not bother. And many who slashed their contributions have not returned to offering them, pushing participation down in their plans even for those who are fully vested. If these businesses have restored the match, they have often cut benefits elsewhere making the choice of contributing more a financial one with a harsh reality.

So when a survey crosses the retirement radar suggesting that 25% of us are planning to work into our eighties, the number misses some key data. Workers who suggest that a retirement number - a dollar amount base on any number of formulae - is what will determine their time of retirement, the estimates they embrace may be outsized. 

These folks fret over the stock market and construct a worse-case scenario for what might happen if the gains they had hoped for fail to materialize.

And then they turn around and overestimate their comfort zone, attempting to replicate exactly what they have now. Here is where they become discouraged. Previous generations of retirees had something we never had: modest outlooks. Skip back just three generations and the elderly were likely to move in with children in retirement.

When the numbers tell only part of the truth, as if shining a narrow beam of light and describing what it illuminates is all that matters to the discussion, we need to refocus and see what we've been missing. Retiring can still happen when it should - which is when you want and not when your retirement account statement says so based on some target. So embracing a time, which 20% of the surveyed did, is a much more realistic parameter. 

The only question left is how can you do it?

Two answers are worth repeating: you need to become a little more austere in your fifties and save more, much more. The reality of the harsh regime will stiffen your resolve for when work is not what you want to do. It is practice with a safety net. the second is readjusting your expectations and plan for those realities. The investment you make to mentally prepare yourself for this less-than-what-you-had-previously-planned retirement is still a plan and will work. And if its any comfort, the data shows that too many don't even have that!