"Left" Overs

I’ve never been big on leftovers. Now, I know that many relish the taste of cold pizza for breakfast, while others swear that a desirable marinating takes place during storage. As for me, no matter how good the original dish, and despite the wonders of microwaving, I have a hard time getting excited about sitting down to a meal comprised of things that (at least in some cases) weren’t good enough to finish the first time.

When it comes to retirement savings, most still seem to “begin” with whatever is “left over” — after bills, living expenses, food and the like.

Not that we’re comfortable with that approach. A recent Wells Fargo/Gallup survey found that, taking their savings and Social Security income into consideration, more than two-thirds (69%) of investors say they are “highly” or “somewhat” confident they will have enough money to maintain their desired lifestyle throughout their retirement years. However, nearly half (46%) are still “very” or “somewhat” worried about outliving their savings, including 50% of non-retirees and 36% of retirees.

Nor is it a uniquely American issue; the Towers Watson Global Benefit Attitudes Survey found that in developed economies typically two-thirds of respondents believe their financial resources will support 15 years of retirement, but less than half are confident when considering 25 years into retirement.

So, how are we dealing with this worry about running out of money? Well, surveys are beginning to indicate that this uncertainty is already translating into extended work lives — or at least some expectation of being able to do so. Simply stated, for some, the “answer” to not having enough saved to retire is simply to work longer. Mathematically, those assumptions can produce a satisfying projected outcome. Unfortunately, like an assumption that your retirement investments will return 12% annually for the next 30 years, the data suggests that the reality of working longer is often undermined by circumstances beyond the individual’s control.

On the path toward more realistic assumptions, a growing number of providers now make available a projection as to how much monthly income a participant’s retirement savings would produce, and in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has proposed that a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance. These efforts will doubtless make it easier for today’s workers to anticipate how much retirement income they will have available, based on certain assumptions.

As for those already in retirement — and unable to adjust assumptions— some studies have shown that retirees are adjusting to their income realities — though arguably those are the kind of reality adjustments most would rather not be forced to make.

For those with time to prepare ahead, while we know that the requirements of the “here and now” frequently intrude on our preparations for the “there and then,” there’s something to be said for taking the time now to think about what those retirement savings “leftovers” could taste like — and how small the portions could be.

- Nevin E. Adams, JD

"Working" Capital

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or — as often as not these days — to work longer and save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

It should probably come as no surprise that American workers are expecting to work longer. The Retirement Confidence Survey notes that in 1991, just 11% of workers expected to retire after age 65. This year that was up to 33% of workers, and another 10% who said they don’t plan to retire at all.

However, the timing of the retirement decision is often not within an individual’s control. A recent survey conducted by Merrill Lynch and Age Wave found that a majority of retirees surveyed (55%) say they retired earlier than they had expected — just 7% later than they expected. Similar trends were found in EBRI’s 2014 Retirement Confidence Survey (RCS), where while more than one-in-five (22%) of workers say they plan to wait at least until age 70 to retire, only 9% of current retirees actually did so. In fact, going back to 1991, the RCS has found that the median (midpoint) age at which retirees report they retired has remained at age 62 throughout this time.

In fact, the RCS has consistently found not only that a large percentage of retirees leave the work force earlier than planned (49% in 2014), but that many retirees who retired earlier than planned cite negative reasons for leaving the work force when they did, including:

• health problems or disability (61%);

• changes at their company (such as downsizing or closure (18%); or 

• having to care for a spouse or another family member (18%). 

The Merrill Lynch/Age Wave survey cautions that while early retirement used to be equated with financial success, today’s retirees say that health problems are now the top reason for their early retirement (37%). In fact, the surveys indicate that the issues that seem to be triggering earlier-than-expected retirements not only serve to cut short working (and savings) careers, but bring with them additional expense.

Retirement planning requires a lot of assumptions — things like how much we’ll need to live, the return(s) on our investments, how long we’ll live in retirement, and when that retirement will begin.

However, the data also suggest that the assumption that we’ll be able to work to — much less through — the traditional retirement age of 65 may be one of the more optimistic.

- Nevin E. Adams, JD

Under Covered

Have you heard this one? “Only about half of working Americans are covered by a workplace retirement plan.”

Sure you have. It’s a statistic that is widely cited and reported, both in the mainstream press and on Capitol Hill. It comes from a reliable, objective source (the U.S. Census Bureau’s Current Population Survey) and conjures up a compelling need for action by advisors (and others) hoping and working to expand the availability of workplace retirement plans.

In reviewing the Census Bureau data, the Employee Benefit Research Institute (EBRI) recently noted that, in 2011, 78.5 million workers worked for an employer or union that did not sponsor a retirement plan. That is the “less than half” number cited, and reported, with such vigor.

However, when you look at the data underlying that aggregate number, you find it includes:

• 8.9 million people who were self-employed (and thus arguably are prevented from being covered by their own inaction);
• 6.2 million who were under the age of 21 (who, being under ERISA’s mandated age coverage level, would logically not be “covered”);
• 3.9 million who were age 65 or older (and beyond “normal” retirement age);
• just over 31 million who were not full-time, full-year workers; and
• 16.8 million who had annual earnings of less than $10,000.

When you take those factors into account, it’s pretty easy to see logical reasons why so many workers are not “covered.” When you filter out the overlap between those categories — situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings and are not full-time, full-year workers) — there are about 42.4 million workers whose lack of coverage might logically be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

Not that there isn’t a gap in coverage — unpublished estimates from EBRI drawn from the March 2013 Current Population Survey suggest that approximately 20 million private sector workers earning between $30,000 and $100,000 per year don’t have access to a retirement plan at work. That’s a gap that needs to be filled, and advisors, working with plan sponsors and providers, are working to do so every day.

So yes, claiming that “fewer than half of working Americans have access to a workplace retirement plan” is technically accurate. But while it makes for a compelling headline, it represents a gap in news coverage of the issue that hinders our understanding of the real factors underlying the data, and in the process undermines our ability to address it.

- Nevin E. Adams, JD

"Class" of 74

Pensions were not on my mind in 1974, certainly not on Labor Day of that year.  While I was pondering my new college textbooks, President Gerald Ford, less than a month in that role, signed into law the Employee Retirement Income Security Act of 1974 – better known to most of us as ERISA. Little did I know at the time that that law – and the structure it provided to the nation’s private pension system – would, in the years to follow, play such an integral role in my life.

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974.  Rather, it was designed to regulate what was there and would yet come to be – to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards.  And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”?  Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.”  Today that system has grown to exceed $17 trillion, covering more than 85 million workers in more than 700,000 plans.

The composition of the plans, like the composition of the workforce those plans cover, has changed over time.  While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. 

Forty years on, ERISA – and the nation’s retirement challenges – may yet be a work in progress.  But, by any measure, this “class of 74” has done the nation a great service.

-          Nevin E. Adams, JD