Retirement in Crisis

November 10, 2006

I received an email from a subscriber (thanks Helen) suggesting that I watch the PBS Frontline special titled “Can You Afford to Retire”. I was so impressed with the program that I have decided to focus today’s podcast entirely on the special. Provided below is a link to watch the show for FREE:

Frontline special; “CAN YOU AFFORD TO RETIRE?”

The focus of the program is on the changing retirement landscape.

1974 Retirement Funding:
11% Employee
89% Employer

2006 Retirement Funding:
51% Employee
49% Employer
“Defined Pensions”: The Endangered Species
** In the not so distant past employers provided for their employees retirement through pension plans.
** Changes in the Global marketplace have led all but a few companies away from Defined Benefit Pensions; instead favoring Defined Contribution Plans (i.e. 401ks, 403bs)
** Pensions have become too expensive for companies to offer in the competitive global marketplace
** Pensions also create legacy liabilities that can drain the financial health of companies (longer life expectancies of workers & loss of flexibility in financial streamlining)
** Pensions also had a tendency to be underfunded by corporations because of the unrealistic growth assumptions used based upon the run away stock market of the 90s

How Deep is the Crisis?
** The Pension Benefit Guarantee Company (PBGC – government org. that provides a low level of pension insurance) estimates the following:
** There are 18,000 pensions that are currently underfunded (promised benefits do not equal assets of the plan)
** The estimated financial shortfall is over $450 Billion (that is Billion with a B!)

The Horrible Truth = Bankruptcy has become an accepted tool for corporated America
Unfortunately many corporations that struggle to compete in the marketplace have decided that the easiest path to recovery is to relieve themselves of their obligations/promises of a comfortable retirement for their employees

Pension Alternative – 401ks and Employee Ownership
401ks and similiar plans have become the preferred retirement tool for the majoritiy of corporate America.
** 401ks offer tremendous opportunities to employees because they have complete ownership of their assets (this allows employees to grow their assets and potentially pass on wealth to their children and grandchildren)
** 401ks also offer the ability to lower your taxes by saving for retirement since the assets are not taxed until you actually take distributions (tax-deferred growth)

The Problem:

Most Workers are Lazy and Uninterested in their Retirement
** Low Participtation; 25-30% do not join thier plans
** Only 10% invest the maximum
Many Use their Retirement Savings as a Rainy Day Fund
** 50% of workers liquidate and take the cash from their retirment plan when they change jobs

Most Workers Underestimate how much they need to save for retirement
Average balance of retirement savings account is $29,000 according to the Federal Reserve
** At a minimum you need 8-10 times your gross wages in a retirement account to cover the basics
** 15-20% is what you need to devote from each pay check towards your retirement

Most Workers are Horrible Investors
2003 DALBAR Study – Average equity investor earned 2.57% (1984-2002) vs. 12.22% for the S&P 500 during the same period
** Yield Disparity = In most retirement plans the top 20% (based upon income) outperform the bottom 20% by 5-7 times their annual returns (in other words the rich get richer based upon understanding how investments work)





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