A Retiring Mind(set)

  I’ve written previously – albeit just a couple of times – about my decision to “retire.” Not that I don’t have stories to share, and perhaps even insights to impart.[i] I’ve mostly held off because (a) people keep telling me I “suck” at retirement, and (b) I have come to believe that every retirement experience is unique. 

That said, of late, I have become aware of just how many folks write and counsel about retirement – who are actually well short of that milestone. I’m not saying that guidance is irrelevant – I’m just saying that I have found that the reality is… different.

My good friend and podcasting partner Fred Reish (who hasn’t yet crossed over into retirement, it bears noting) came up with the idea of doing a podcast where we talk to retirement industry people about their retirement(s). We’ve now done three of those interviews – and I hope that you’ll come check them out. 

In the most recent episode,[ii] Fred thought it would be good to turn the tables, so to speak – and interview me about my experience(s). As I contemplated that discussion – bear in mind, I’ve already had the opportunity to share some of that experience with Fred – and considered my current retirement realities, I felt that we (and it was DEFINITELY a joint project with my wife) had – though perhaps accidentally at times – done a pretty good job. 

That said, and as unique as I (still) think each retirement is, there are a number of key touchpoints that I think are worth sharing here that gave us a solid foundation for “retirement.”

Can You Afford to Retire?

That turns out to be the $64,000 question (literally). It’s a question that our industry tries to help people answer in a variety of ways, generally with some relatively simplistic heuristics. It really requires the answer to two fundamental questions: (1) how much it will cost you to live in retirement, and (2) what financial resources do you have available to fund retirement. 

Since most people have NO idea of the answer to either of those questions 30 years in advance, we tend to provide the aforementioned heuristics; things like 70% of pre-retirement income as a stand in for the former, or a “swag” simplistic number like “15 times your current pay” (at, say age 30) as targets for the latter.

That said, there’s nothing like precision in planning. The good news is, the closer you get to a retirement date, the more accurate such projections are. The bad news is, the closer you get to a retirement date, the less time you have to fill in the reality gap. I will say this – we have been able to live comfortably on far less than 70% of pre-retirement income. 

Where Will You Live?

Let’s face it, a big part of “can you afford” is the cost of living – where you’re living. While there’s a lot of talk about downsizing or moving in retirement, statistics support the notion that many stay put, whether because of family or social connections – or just the comfort in being “home.” 

As it turned out, we did our budgeting based on where we were living at the time – which can be impacted based on where you plan to live in retirement (and then we decided to move to a more financially friendly locale).

(When) Will You Move?

We knew (pretty much from the day we moved in a decade earlier) that the multi-story home we had that accommodated us and three kids was not only more house than we needed, but would – at some point in the not-so-distant future – be impractical considering the inevitable physical declines that come with aging. So, yes – we were targeting ranches or split levels (which, at least in the areas we were considering, turned out to be a limiting factor).    

We decided to make that shift now, rather than later – let’s face it, moving is a big undertaking, and it doesn’t get any easier with age. And my wife wisely pointed out that if we were going to do some travelling (and we do) that it would make sense to establish our new “home base” first. 

We did so with several factors in mind. We were focused on (1) access to good healthcare, (2) proximity to a college – figuring that would be good for access to culture, concerts, economic impact, etc., (3) warmth, but with seasons (we’re not fans of winter), (4) no or diminished worries about mother nature (tornadoes, earthquakes, wildfires, or hurricanes (and then, Helene!), and an improved cost of living (including considerations of state income tax).     

When Should You Do This? 

My wife and I spent a lot of time talking about retirement – and we had done interim planning with a couple of financial advisors – though it didn’t get “real” until I crossed that age 65 “threshold.” Not that I hadn’t given it thought over the course of my career. Indeed, we had done some planning prior to that – and it pretty well validated our status.     

I was pretty focused on the financial side of things. Once we had outlined the costs[iii] – built in a monthly cushion – we had our target. The next item of business was to get a reading on Social Security – not only the timing of claiming, but – since both of us had Social Security benefits to claim – how/if we’d deal with joint and survivor issues. I’d highly recommend signing up for an account with Social Security (if you haven’t already done so) – and to take advantage of the calculators on their site to get a solid idea of what you can expect.    

Step two was to look at existing lifetime income options (if you’ve ever worked for an employer that offered a pension, even if it’s small, it’s worth considering). While full pensions in the private sector are rare, every little bit – particularly “little bits” that are guaranteed for life – helps.  

And then you see how the established lifetime income compares to the projected monthly costs. If there’s a gap – well then you look at your other assets (notably your 401(k) or 403(b)) – and then either figure out a plan for withdrawal, or a plan to acquire/invest in retirement income.

But that’s a topic for another post. 

- Nevin E. Adams, JD 

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[i] My retirement journey is still being mapped out – but of course I’ve written about it…some…

The Biggest Surprise About (My) Retirement (napa-net.org)

Retirement Industry Leader Nevin Adams to 'Retire' (napa-net.org)

My 'Retirement' Account (napa-net.org)

[ii] You can check it out at https://podcasters.spotify.com/pod/show/nevin-adams5/episodes/Season-1--Episode-3-Nevin-E--Adams--JD-e2ouquf/a-abi5pcl (or on your preferred podcasting platform).

[iii] One big cost variable is health care premiums – Medicare – which, as I have written about previously (see The Biggest Surprise About (My) Retirement (napa-net.org)), is probably more complicated than you may appreciate – it was for me, though we’ve been pleased with the outcome.

A Retirement Crisis of Complicity

 A recent headline asks: “Why Aren’t We Talking About America’s Retirement Crisis?”  Really? It seems to me that that’s ALL we’re talking about!

Even more ironically, that headline appeared in an op-ed crafted by none other than Teresa Ghilarducci (and her new co-author, Christopher Cook) who, so far as I can discern, talks (and writes books) about little other than the so-called “crisis.” And this specific op-ed, as hers often do, got picked up in syndication (see this link for details).  

But then, this week I stumbled across a LinkedIn post from Andrew Biggs, which matter-of-factly stated, “After a period of trying-in-good-faith, I've concluded I have to be more, um, forthright in calling out, shall we say, misinformation regarding Americans' retirement income security.” Said another way, it appears that Mr. Biggs has come to the conclusion – as I have – that polite commentary and even-handed discussions are insufficient to put to bed what continue to be extreme mischaracterizations (and, in some cases, outright lies) about the true state of retirement in America.

Thankfully, in an article posted on Forbes (titled “Fact-Checking Cook and Ghilarducci on Retirement (Again),” Biggs once again takes to task a follow up to his earlier response to (yet) another set of exaggerated claims and assertions by the pair. 

Here’s the latest:

“Nearly half of today’s middle-class adults will be poor or near-poor in retirement.”

Now, that’s a pretty bold statement – and one made without much backing. Actually, the article links to work by the New School (where Ghilarducci is the Bernard L. and Irene Schwartz Professor of Economics at the New School for Social Research in New York City) and is based on “Authors’ calculation using the 2014 Survey of Income and Program Participation.” Note “author’s calculation.” 

Biggs provides his own analysis of data, noting that the Census Bureau defines “near poverty” as having an income between 100% and 125% of the federal poverty threshold, while, according to Census Bureau research, (only) about 6.9% of age 65+ Americans have incomes below the poverty line. He then notes that about 14.8% had incomes below 150% of the poverty line, which is above near-poverty – and that if you split THAT group in half, then around 12.9% of current seniors are either poor or near-poor – TODAY.  

But by most objective measures (Biggs cites the Social Security Administration and the Urban Institute), he suggests that elderly poverty will DECLINE in the coming decades. Beyond that, he comments – as he has previously – that the vast majority of Americans who are poor in old age were poor PRIOR TO retirement. So, where does the conclusion that “nearly half” will be poor or near poor come from? While some of that might be attributed to the specifics of the aforementioned “author’s calculation,” another subtle clue can be found in the reference to “according to internationally-recognized measures”; we’ve seen those in Ghilarducci’s recommendations before – those are the ones that unfavorably compare the economic standards of life in America to Kazakhstan.   

“Nearly half of older Americans have no retirement savings and must rely solely on Social Security in old age.”

As it turns out, this is a two-fer – and Biggs breaks it down as follows. He points out – as he has previously – that the “nearly half of older Americans have no retirement savings” counts only individual retirement accounts. It completely ignores things like pensions (which, according to the Federal Reserve, Americans’ accrued benefits under traditional pensions top $16 trillion). It also excludes a taxable investment account, real estate, a farm or small business, and so forth. Biggs notes that, if you include all forms of retirement savings (and why wouldn’t you, unless you were trying to make a point?), you find a totally different picture. He cites the Federal Reserve, relying on its Survey of Household Economics and Decision-making, in finding that 88% of Americans aged 60 and over have retirement savings on top of Social Security. 

The second part – the level of reliance on Social Security – is also overstated. Biggs cites Social Security Administration researcher Lynn Fisher’s research using IRS data matched to government household surveys to examine how heavily retiree households rely on Social Security. She found that only 4.5% of elderly persons received all their income from Social Security for all of their income. “In other words, literally one-tenth of the figure Cook and Ghilarducci claim,” Biggs notes.  He also explains that the Census Bureau analyzed the number of seniors who receive at least 90% of their income from Social Security – just 12.2%, despite using a lower bar than Cook and Ghilarducci.

About 79% of people aged 62 to 70 can’t afford their pre-retirement living standards.

There’s plenty of actual IRS data – you know, the kind that people provide to the IRS under penalty of law – available to show that retirement income tends to compare favorably with pre-retirement.  Biggs turns to data from economists Peter Brady and Steven Bass that tracked incomes from ages 55 through 72 – and found that for the typical household, income drops by only 12% from age 55 to 65. Which, of course, means that the typical 65-year-old has a “replacement rate” of about 88%.  Beyond that, he explains that for the poorest 25% of seniors, their incomes increase in retirement.

And then there’s the alternative of just asking folks in retirement. Again, he references the Fed’s Survey of Household Economies and Decision-making which found that among 52-to-61-year-olds from 2019-2023, 76% said they were at least “Doing okay” – but among 62-to-70-year-olds, 82% did so. Among those age 75 and over, 86% said they were at least doing okay financially, the best in any age group. 

Of course, op-eds aren’t subjected to the same level of scrutiny as news – not that there’s been any shortage of news coverage on the topic of the looming retirement crisis. Let’s face it, there have been – and continue to be – a series of one after another industry survey that simply parrots the concerns of working Americans – the vast majority of which don’t seem to have ever tried to figure out their financial needs or reserves in retirement, apparently relying solely on the screaming headlines that assure them that retirement Armageddon is just over the horizon. It doesn’t help matters that retirement industry leaders echo and reinforce that perception.    

That said, and to answer Ghilarducci’s question, at least some of us are not just talking, but are actively working to forestall the retirement “crisis” she and others have been “promoting” for the past several years. No doubt, some will struggle in retirement – as they have prior to that date. But we need to quit excusing such “promotion” as anything other than hyperbole designed to sell books, inspire televised interviews and promote “solutions” that would undermine the amazing success of the private retirement system. 

If we don’t – well, we’re quite simply being a complicit enabler in helping spread that narrative by our silence.

- Nevin E. Adams, JD

What If There Was No ERISA?

 New research puts a new twist on “A Wonderful Life” – answering the question, what if there hadn’t been an ERISA?

ERISA is, of course, the Employee Retirement Income Security Act of 1974 which just turned 50. The analysis[i] – put together by Morningstar Retirement’s Director of Retirement Studies Jack VanDerhei and Associate Director of Retirement Studies Spencer Look – first looks at the current “status quo” retirement readiness impact (more specifically, retirement readiness shortfalls). It then looks at the potential result if there had been no ERISA – or, perhaps more precisely if there had been no individual account retirement plans (defined contribution and IRAs), though allowance was made for the probability of saving to an IRA. 

Now, anyone with a realistic assessment/awareness of the limited availability of traditional pension plans in the private sector (before AND after ERISA’s passage) can hardly be surprised to find that the absence of individual accounts would have a significant negative impact. That said, you might be surprised at the size of that impact. 

The research notes that, when aggregated across all four income categories, the probability of Gen X households running short of money in retirement (granted, this is running short by as little as $1[ii]) would increase from 47% under the status quo to 59%. Millennials would fare worse, with the aggregate probability increasing from 44% to 69%, and Gen Z households would see their exposure soar from a risk of 37% in today’s environment to what the researchers termed a “devastating 72%” without individual account retirement plans. 

The paper also projects the outcomes across various income and education demographics, as well as industry, gender and race. To sum it up, single females, Hispanic Americans, and non-Hispanic Black Americans were found to be at a higher risk of retirement shortfalls. Needless to say perhaps – though the paper does – “[t]he elimination of DC participation and savings would drastically reduce the probability of a successful retirement, particularly for middle-income groups, as they heavily rely on these plans.”

Considering the positive impact of those individual accounts – albeit one limited by the status quo reality of access – it should come as no surprise that a projection that greatly broadens that access – alongside automatic enrollment and auto-escalation (as proscribed in the Automatic IRA Act of 2024) notably improves retirement prospects. Indeed, the researchers find that it could substantially improve retirement outcomes, with an aggregate average wealth ratio increase of 23.8% – and that’s assuming an opt-out rate of 30%![iii]   

All in all, just like good old George Bailey, it’s easy to underestimate the potential impact of the individual account regime that ERISA ultimately fostered – until you are able to imagine what things would be like without it. That said, this research affirms the positive impact – and puts some numbers behind it – while also affirming policy considerations for the future. 

Did I hear a bell ringing…

 - Nevin E. Adams, JD 

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[i] With a title nearly as long as the paper itself “The Evolution of Retirement-Income Adequacy Under ERISA With a Focus on Defined-Contribution Plans: A Review of the Status Quo, Counterfactual Evidence, and an Analysis of Changes for the Future.”

[ii] Also worth noting, this analysis, unlike most other projection models – takes into account the potential impact of long-term care expenses.

[iii] Which turns out to be close, but less than opt-out rates in a number of the current state-run IRAs.

(Let’s) Never Forget

  It’s hard to believe that today there are people in the workforce who weren’t even alive on Sept. 11, 2001.

In fact, it’s been labeled a defining event for Millennials – a date marker between those who were alive on that date and those (Generation Z) who weren’t. That said, the passage of time has surely dimmed the memory even for many who did live through it. More’s the pity.

Odds are if you were “here” on that most awful of days, you’ll remember exactly where you were. I was travelling from one coast to the other – heading to speak at a conference early on that bright Tuesday morning in 2001. In fact, I was in the middle of that cross-country flight, literally running from one terminal to another in Dallas, Texas when my cellphone rang. I was annoyed – the hour was early, my flight in had been late, and the timing between that and my connection was uncomfortably short – particularly for a flight that was in another terminal. 

The call was from my wife – I assumed she was simply checking to see if I had landed safely – and she was, though not for the reasons I thought. See, I had been on an American Airlines flight heading for Los Angeles, after all – and at that time, not much else was known about the first plane that struck the World Trade Center beyond it being an American Airlines flight headed to LA. I was breathless – could hardly make out what she was saying from the noise in the terminal. I was sure I was misunderstanding what she claimed to have seen on TV.

Would that I had…

And then as I slowed, for the first time it sank in – and I saw what my subconscious mind had seen, but not registered – the crowds surrounding the TV monitors throughout the terminal.

My first thought was to try and get on a flight back home – fortunately my travel agent’s first thought was to get me a hotel room. They’d be in short supply shortly – and, sure enough, on that most awful of days – I wound up stranded in a hotel room hundreds of insurmountable miles away from family and friends. It was, without a doubt, the longest day – and loneliest night – of my life.

In fact, I was to spend the next several days at that Dallas hotel. There were no planes flying, no rental cars to be had – nowhere to go for what turned out to be three interminably long days. As that long week drew to a close, I was finally able to get a rental car and begin a long two-day journey home. It was a long, lonely drive, but one that gave me a lot of time to think, though most of that drive was a blur, just mile after endless mile of open road with nothing but AM talk radio to fill the void.

And then, somewhere in a remote section of Arkansas, I spotted something approaching in my rearview mirror. There hadn’t been much traffic on the road – in fact, it had been a couple of hours since I had seen anyone at all, so the movement caught my eye. As they came into focus, I saw it was a group of bikers – at least a couple of dozen of them, spread out across the highway – led by a particularly “scruffy” looking guy with a long beard and lots of menacing tattoos on a big bike. Out in the middle of nowhere, all alone on this deserted highway – well, I was nervous to say the least as they pulled alongside.

And then, as the lead cyclist pulled past me, I saw unfurled behind him on that big bike an enormous American flag.

At that moment, for the first time in 72 hours, I felt a sense of peace – the comfort you feel inside when you know you are going … home.

I’ve thought back on that day – and that feeling – many times since then. Even today, I can still feel that ache of being kept apart from those I love as if it were yesterday – but I also draw comfort from that memory of that biker gang driving by me flying our nation’s flag.   

On not a few mornings since that awful September day, I’ve thought about how many went to work, how many boarded a plane, not realizing that they would not get to come home, not just that day – but ever again. How many on that day sacrificed their lives so that others could go home. How many still put their lives on the line every day, here and abroad.

We take a lot for granted in this life, nothing more cavalierly than there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are.

This week as we remember that most awful of days, and the loss of those no longer with us, let’s never forget – and take a moment – together – to treasure what we have – and those we have to share it with still.

Peace.

- Nevin E. Adams, JD

ERISA—Still ‘Nifty’ at 50

 I’ve long relished telling “newbies” to the retirement space that ERISA was the second big executive act of then-newly enshrined President Gerald R. Ford—less than one month after he took office. 

In fairness—and I’m not exactly a kid—I was barely out of high school when that event occurred.  I’ve never had a benefits program (retirement OR healthcare, and us retirement geeks tend to forget that ERISA also has sway over workplace health plans) that wasn’t operating under its auspices—and so, talking about what ERISA has done/changed requires going back before my personal experience. And yet, despite the disparaging acronym “Every Ridiculous Idea Since Adam,” what ERISA has accomplished—and what has emerged in its aftermath—seems truly remarkable to me. 

ERISA is, of course, the Employee Retirement Income Security Act of 1974—and on Labor Day 2024, that legislation will be 50 years young. Not that ERISA created either the concept or the reality of pensions and retirement plans; in fact, the former dates back to the time of the ancient Roman armies. But in America, the first private pension plan was that of the American Express Company in 1875—crafted in an effort to create a stable, career-oriented workforce. By 1899, there were (just) 13 private pension plans in the country.[i]

The reality is that employee pensions had very few protections under the law before ERISA—there were no rules around funding or protections for benefits if the plan sponsor went bankrupt or was sold. Many plans had long vesting schedules requiring as many as 20 to 30 years of service, some plans required employee service periods to be “uninterrupted,” and there were situations where companies reportedly terminated employees just a few months before vesting to avoid having to pay their pension benefits. 

Indeed, ERISA represented a major shift in attitude—inserting the federal government into an oversight role over what, until that point, had pretty well been left to the parties to the employment contract; employers, workers and unions. Perhaps most importantly, it established ERISA’s federal law preemption over what might otherwise have been a mishmash of state regulations and requirements.   

That said, ERISA did not require any employer to establish a retirement plan. It “only” required—and still requires—that those that establish plans meet certain minimum standards. However, the law did a number of things that we take for granted today. At a high level, it established federal standards for things like vesting, participation and eligibility. It established rules regarding reporting and disclosure about plan features, funding and investments to participants—and via mechanisms such as Form 5500, reporting to the government as well. It put limits on benefits—and gives participants the right to sue for benefits and breaches of their fiduciary duty under that law. 

Of course, ERISA wasn’t about making it easy—it was about making sure that the promises made to workers were upheld—and in that sense the EMPLOYEE retirement income security act was aptly named. The poster child for this undertaking was, of course, the bankruptcy (and discarded pension promises) of a major U.S. automaker[ii] (Studebaker,[iii] though arguably it was the assumed pension obligations of Packard that really did it in). And in that regard, SECURITY of those promises[iv] was paramount—it was about quality, not quantity—about ensuring that the promises made were promises kept.

Notably, ERISA established fiduciary duties for those managing retirement plans—requiring that fiduciaries act in the best interest of plan participants and beneficiaries. It laid the groundwork for a definition of fiduciary which would, a year later, find form in the so-called five-part test—which would hold for nearly 50 years.[v]

Has It Worked?

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.”

As of the latest (2021) numbers available, that system has grown to exceed $13 trillion (and another $11.5 trillion in IRAs, much of which came from that private retirement system), covering nearly 100 million active workers (146 million in total) in more than 765,000 plans. Indeed, the Labor Department recently reported that plans disbursed $322.5 billion more than they received in contributions during 2021.

That said, the composition of the plans, like the composition of the workforce those plans cover, has changed significantly 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 (people act like) 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 than they otherwise would be.

Fifty years on, ERISA—and the nation’s retirement challenges—may yet be a work in progress. But it’s hard to imagine American retirement without it. It is a rich legacy that we all benefit from today—and—with luck and the ongoing work to improve upon it—will—for decades to come.

Happy birthday, ERISA!

 

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[i] Steven A. Sass, The Promise of Private Pensions, The First Hundred Years, at 9 (1997).

[ii] I’d wager that a majority of Americans have never even heard of a Studebaker, and the notion that a major U.S. automobile maker once operated out of South Bend, Indiana would likely come as a surprise to most. The Studebaker brothers (there were five of them) went from being blacksmiths in the 1850s to making parts for wagons, to making wheelbarrows (that were in great demand during the 1849 Gold Rush) to building wagons used by the Union Army during the Civil War, before turning to making cars (first electric, then gasoline) after the turn of the century. Indeed, they had a good, long run making automobiles that were generally well regarded for their quality and reliability (their finances, not so much) until a combination of factors (including, ironically, pension funding) resulted in the cessation of production at the South Bend plant on Dec. 20, 1963.

[iii] Roughly 70% of Studebaker’s workers were left without their promised retirement benefits after the South Bend, Indiana plant was closed in 1963. Of some 10,500 current and former employees in the pension plan, about 4,000 with more than 20 years of history at the company received only about 15 cents for each dollar they expected—roughly 3,000 shorter tenured employees got nothing.

[iv] It's been opined by some that ERISA was responsible for the decline of traditional defined benefit pension plans—and certainly the vesting standards, reporting scrutiny, funding standards and the pension insurance premiums from ERISA’s formation of the Pension Benefit Guaranty Corporation (PBGC)—all designed to forestall outcomes like the Studebaker bankruptcy’s impact on its workers’ pensions played a part. While ERISA’s transparency requirements—and those funding requirements—have certainly been economic factors, it seems more likely that wide swings in interest rates, the accounting rigor imposed by FAS 87, the benefit limits imposed—and the elevation of those liabilities on the corporate balance sheet were the real culprits.

[v] Though with litigation pending, the five-part test still lives!