What’s the Worst that Could Happen?

 Did you hear the one about how a rollover delay could cost you $76,000?

Hard to believe? Well, there’s a reason. To get to that number, the folks at PensionBee had to make not just one, but a series of worst-case assumptions. To get to $76,000, you have to assume:

• that you are waiting for a $100,000 check…
• that you get out of the market at exactly the wrong time — a low point right before an extraordinary market surge (that you miss, of course)…
• that continues unabated while you’re “out” of the market… (cause markets only go up)
  • oh, and you’re assumed to be out of the market for EIGHT WEEKS because it’s assumed that your rollover check got lost in the mail, and you had to have it reissued (during which, of course, the markets continue to rise)...
• Oh, and THEN you take that market uptick that you missed (cause, as we all know, markets NEVER go down)...
• 
  and then assume a 7% positive return thereafter on the money you missed (with fees of just 0.85%)… compound it for 30 years (because, apparently, you requested that distribution several decades ago… and voila! That rollover delay, compounded by a series of worst-case assumptions — well, at that point, it’s just math.

Now, that’s not to say it couldn’t possibly happen — but I think we can all admit it’s exaggerated for effect (clicks, anyone). In other words, it assumes the worst that could happen.

Roll ‘Plays’

Now, in fairness, at least PensionBee was honest enough to share their assumptions (and provide some alternate outcomes that were less severe). But, speaking from experience, the rollover process still…sucks. 

I actually contemplated rolling over my 401(k) accounts two different times over the years before the “finality” of retirement pushed me past my reluctance. Granted, in the 20-odd some years since I first contemplated (and struggled with) a rollover, things have improved (more on that in a minute). That said, EVERYBODY (and we’re talking three major 401(k) providers here) insisted on cutting a physical check[i] and mailing it to me (two checks, actually — Roths are distributed separately). 

Now, I don’t know about you, but mail service no longer seems to be as reliable as it once was. And the idea of checks of that size (and probably looking like checks) being dropped off in the mail — well, it gave me pause.[ii] Oh, I was “allowed” to pay a pretty significant premium for “expedited” delivery — but though we’re talking about rates in excess of what Federal Express or UPS might charge, we weren’t talking about delivery that was truly special. 

As it turned out, the checks did arrive (and yes, I paid the premium), leaving me out of the market for about a week. Mitigating that was that my chosen IRA provider allowed me to do a mobile deposit of those checks (Yay!), so at least I was spared the dilemma (and sleepless nights) of putting those in the mail…again.[iii]

Overall, I was pleasantly surprised at how much the rollover process has improved over the past 20 years. I was able to do it all without sitting on hold for interminable periods for the “next available operator” while listening to product pitches (or bad elevator music) — without talking to a single person, in fact, much less people from different firms (sending and receiving). 

I realize there is an opportunity for fraud with wire transfers — but surely no more than with the antiquated process of physically producing and dropping off checks with the United States Postal Service. And, honestly, what’s being charged for “expedited” processing (and with separate charges for Roth and non-Roth accounts) struck me as — well, excessive — certainly for what it seemed to provide (one hates to think of the non-special alternative).    

That said, the reality seems to be that our industry is (still) ever so much better at taking in money than in sending it “out.” Indeed, the cynic in me can’t help but wonder if that is deliberate. 

It may not be the worst that could happen. But there’s certainly room for improvement.

• Nevin E. Adams, JD

 

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[i] That is, unless you want to roll it over to THEIR IRA — in which case, electronic transfer was an option.

[ii] During this process, one of the insurance checks related to my mother’s estate — that looked like a check — was “misdelivered” to the wrong house. Fortunately, I have honest neighbors.

[iii] The New York Times recently profiled the experience of a participant that was not so fortunate — though his check got to him, it was the forwarded checks to his IRA provider that got stolen. See https://www.nytimes.com/2025/05/17/business/paychex-401k-rollover-checks.html?unlocked_article_code=1.KE8.bOS8.VimnT7OedYLF&smid=url-share

When You Assume...

Over the years, so-called personal finance experts have provided valuable information—but also a smattering of misinformation—but I can think of none quite as egregious as some remarks recently made by Dave Ramsey.

By now I’m sure you’ve heard—or heard about—his “counsel” with regard to acceptable retirement withdrawal rates—and his disparagement of the “supernerds” who would dare to disagree with him. As for that counsel, at a high level, Ramsey maintains that an 8% withdrawal rate is not only doable, but sustainable. All you have to do is be invested 100% in equities—oh, and assume a 12% return.[i]

Of course, such machinations have always been predicated on assumptions—about inflation, about market returns and, most notably, about the length of life itself. That said, this didn’t become a specific focus—a so-called “rule of thumb”—until 1994, when financial planner William Bengen[ii] claimed[iii] that over every rolling 30-year time horizon since 1926, retirees holding a portfolio that consisted 50% of stocks and 50% of fixed-income securities could have safely withdrawn an annual amount equal to 4% of their original assets, adjusted for inflation without… running out of money.

That said, even though it was predicated on a number of assumptions that might not be true in the real world—a 30-year withdrawal period, a 50/50 portfolio mix of stocks and bonds, assumptions about inflation—oh, and a schedule of withdrawals unaltered by life’s changing circumstances—well, with the return of inflation as a reality (rather than a theoretical construct), it now seems that there’s an annual scramble to reassess that “safe” withdrawal rate. Indeed, a couple of years back a Morningstar paper challenged its conclusions in view of “current conditions”—opining that “using forward-looking estimates for investment performance and inflation,” the Morningstar authors said that the standard rule of thumb should be lowered to 3.3% from 4%.

That said, this is something of a moving target, and a few weeks ago Morningstar moved the target back to 4% (after having opined that a starting safe withdrawal rate for a 30-year horizon with a 90% probability of success was 3.3% in 2021 and 3.8% in 2022). Enter Dave Ramsey and HIS assumptions that allegedly support a much higher rate (though I don’t recall him offering a probability figure of savings lasting as long as your life[iv]).

Now, in fairness, even the Morningstar folks allow for some variance in “safe” withdrawal rates—explaining that the increase from 2022 in this “highest safest starting withdrawal percentage” for a 30-year horizon with a 90% probability of success “owes largely to higher fixed-income yields, along with a lower long-term inflation estimate.” Moreover, they assert that it’s predicated on assumed portfolios that hold “between 20% and 40% in equities and the remainder in bonds and cash”—which is, in itself, a fairly sizeable range.

There’s been plenty of evidence—both empirical and anecdotal—that retirement “spends” aren’t nice, even streams. Life’s circumstances change, of course—and our health care, and health care costs, are notoriously variable. There’s a sense that the pace of spending earlier in retirement is more like that anticipated in most retirement education brochures—travelling and such—but that pace slows down as we do.

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise. A 4% “rule” may be simplistic, but it’s also simple—and when it comes to getting your arms around complex financial concepts and distant future events, there’s something to be said for that.

But—and as Dave Ramsey’s response should remind us—when you “assume” … (or when others assume on your behalf) make sure you understand the assumptions required to make it “work”—and perhaps more importantly, the likelihood/probability that those assumptions will be a reality. 

- Nevin E. Adams, JD

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[i] One of the more humorous—and insightful—rebuttals on all this came from SRP’s Jeanne Sutton: https://www.linkedin.com/feed/update/urn:li:activity:7130951358609838080/

[ii] https://www.forbes.com/advisor/retirement/four-percent-rule-retirement/

[iii] See www.portfolioconstruction.com.au/obj/articles_perspectives/retailinvestor.org_pdf_Bengen1.pdf

[iv] That said, Morningstar’s John Rekenthaler has—and you can read that analysis here

 

The 'Best' of 2022

I’ve been writing a weekly column (and then some) for more than two decades now. Some are easier to write (and read)—and some hold up better (and longer) than others. These are some of my (and perhaps your) favorites from 2022.

Let me know what you think in the comments below… particularly if I have missed one of your favorites…  

7 Things to Know About the New ESG Regulation

There’s a lot to unpack in that regulation (and the rest of the 236-pages that help explain its process and rationale), but here’s a few things that seem particularly important to note at the outset. https://www.napa-net.org/news-info/daily-news/7-things-know-about-new-esg-regulation

‘Damned’ (Even) If You Do

The flurry of lawsuits unleashed on holders of the BlackRock LifePath target-date funds is not without precedent—but it’s surely a head scratcher. https://www.napa-net.org/news-info/daily-news/damned-even-if-you-do

Things to Ponder

In the course of my day, I talk to (and email with) people, read a lot, and every so often jot down a random thought or insight that gives me pause and makes me think. See what you think. https://www.napa-net.org/news-info/daily-news/things-ponder

6 Obstacles to Retirement Income Adoption

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective. https://www.napa-net.org/news-info/daily-news/6-obstacles-retirement-income-adoption

The Sure Not-So-Sure Thing

Perhaps the only “sure” things are death and taxes after all—but the lesson for those of us still drawing a paycheck and planning for retirement is the importance of preparing for that third “sure” thing when it comes to retirement planning. https://www.napa-net.org/news-info/daily-news/sure-not-so-sure-thing

7 Assumptions That Can Derail Your Retirement Reality

The future is an uncertain thing, and planning for uncertainty inevitably involves making some assumptions. Here are seven that, done improperly, can—yes, derail your retirement realities. https://www.napa-net.org/news-info/daily-news/7-assumptions-can-derail-your-retirement-reality

5 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are some assumptions that can create real headaches for retirement plan fiduciaries. https://www.napa-net.org/news-info/daily-news/5-dangerous-fiduciary-assumptions

9 Things You May Not Know About the Saver’s Credit 

As I was pulling together tax information this weekend, I was reminded that, in addition to the benefits of pre-tax savings and deferred taxes on retirement savings, there’s another tax benefit—but one of which many aren’t aware. https://www.napa-net.org/news-info/daily-news/9-things-you-may-not-know-about-savers-credit

Not-So-Unforeseen Outcomes

Thanks to their mother, my kids have grown up with a variety of pets in our house—but none more bizarre than our experience with… a chicken. https://www.napa-net.org/news-info/daily-news/not-so-unforeseen-outcomes

- Nevin E. Adams, JD

The Biggest Retirement Assumption

There have been many different solutions put forth over the years to remedy the nation’s retirement ills, but regardless of your perception of the coming crisis (including those who believe such notions are overblown), there is a constant in every estimation of our retirement future.[1]

Yes, I’m talking about Social Security. Indeed, we rely on the inevitability of those benefits with a certainty generally accorded only to death and taxes (both of which play a significant role in Social Security eligibility and claiming, as it turns out).

And yet, for all its centrality in planning, Social Security faces its own funding crisis, or is projected to, according to the trustees of the program, in a report formally titled, “The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. ” That the program will run short of funds is no secret, with the only variable being at what exact point in the future will benefits have to be reduced (it changes modestly from year to year, depending on a couple of variables).

Not only is the funding crisis well-known, the aforementioned trustees’ report acknowledges, and routinely outlines a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall,” along with cost estimates.

Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving was then a more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:

• increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
• reducing benefits (by raising the claiming age) or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 

So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination – as it was in 1983 – is the approach that seems the most likely outcome.

Except, of course, the answer isn’t “just” math, it’s money. And fixing it – while not hard to figure out – will cost money that those who would make that call would “rather” spend on other things. It’s also fraught – as it was in the 1980s – with political hot buttons. Social Security has long been considered a “third rail” of American politics, and politicians have been burned for merely suggesting the need for change, much less putting forth specific proposals.

That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult – the more expensive – it will be.

Yes, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners, and legislators alike. Today as we stand at the brink of the biggest retirement reform legislation in a decade – as we consider a growing number of state retirement savings mandates, and contemplate a federal expansion – we also know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system – they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

It’s time, in short, for an adult conversation about – and some adult action – to make sure that that most fundamental of retirement planning assumptions remains something we can count on.

- Nevin E. Adams, JD
 
Footnote
1. A notable exception is the Employee Benefit Research Institute's Jack VanDerhei, who routinely includes an assessment of the impact of the projected reductions in Social Security benefits if the current funding status remains unchanged. In a March 2019 Issue Brief, he notes that "when pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion."

6 Assumptions That Can Wreck a Retirement

The future is an uncertain thing, and planning for uncertainty inevitably involves making some assumptions.

Here are six that, done improperly, can wreck your retirement.

How Long You’ll Live

The good news we are living longer – but that means that retirements can last longer, and medical costs can run higher. But while we’re living longer, studies indicate that we tend to underestimate how much longer we will live.

The Social Security Administration notes that a man reaching age 65 today can expect to live, on average, until age 84.3, a woman turning age 65 today can expect to live, on average, until age 86.6.

But those are just averages. About one out of every four 65-year-olds today will live past age 90, and 1 out of 10 will live past age 95.

How Long You’ll Work

Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will surely boost your projected outcomes (it both gives you more time to save, and reduces the time that you will be drawing down those savings), it may not be realistic for many individuals.
Indeed, the 2016 Retirement Confidence Survey from the nonpartisan Employee Benefit Research Institute (EBRI) notes that the age at which workers expect to retire has been slowly rising. In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, that number had more than tripled; 37% of workers now report that they expect to retire after age 65, and 6% say they don’t plan to retire at all. At the same time, the percentage of workers who say they expect to retire before age 65 has dropped by half, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

How Fast You’ll Withdraw

For years, financial planners had touted the 4% “rule,” a rule of thumb for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. There’s no real magic to the 4% rule, of course – it’s just the math that allows for a systematic withdrawal of funds roughly timed to coincide with the expected lifespan of the individual. Portfolio returns can impact this, of course, so much so that that factor, coupled with the increased longevity, has these days led some to call instead for a 3% rule.

But whatever formula you use, it’s important to remember that while a low rate of withdrawals might help preserve your portfolio, it might not produce a very comfortable living.

How Much You’ll Earn on What You Save

Let’s face it – if you could predict future market returns, you probably wouldn’t have to be worrying about retirement. But as we all know – and have seen proven time and again over the past couple of decades, markets frequently defy even the expectations of experts.

There are bad investments that can cost you money, and good investments that can help your account grow faster.

So, what should a non-expert assume? It’s generally best to be conservative – one of the biggest mistakes individuals make is assuming outsized returns on their savings. But make sure that assumption is consistent with how your savings is invested. For example, if you have all your savings invested in a money market fund, it’s highly unlikely (some would say impossible in the current environment) for you to actually get an 8% return.

How Much More Things Will Cost

Twenty or 30 years from now, prices are likely to change, and for many, those prices will increase. Consider that, overall, the average inflation rate for 2016 was 1.3%. In 2015, inflation climbed 0.7% with an average running pace of 0.1%, with gasoline prices plunging that year. It’s not that all prices will always go up – but they often do, and might increase faster than your income.

There’s a calculator that you might find interesting at http://www.usinflationcalculator.com/.

How Much Differently You’ll Spend

This has two components. Some costs (notably medical) frequently increase in retirement, particularly with the longevity trends noted above. Others – such as commuting costs, and even the “cost” of saving – decrease.

But think – 10 years ago would a “fit bit” have even been on your radar, much less your arm? New products and services continue to emerge – some will make your retirement budget more manageable – others may well strain it.

With all the uncertainty and variables to consider – there is one key assumption about retirement saving that you can, to some extent, control – and that’s “How Much You’ll Save.” Because what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any), and some help in making solid, reality-based assumptions.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at choosetosave.org. Even better, if you don’t know what you’re doing, get help – and if there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD

Attention Deficit Disorder

We have long been concerned about the attention deficit of participants when it comes to their 401(k) plans. There’s the problem of getting them to pay attention to the importance of saving in the first place, and of choosing an appropriate level of savings, the challenge of helping them make sound investment decisions—and the biggest challenge of all, getting them to reconsider those choices over time. Our continued inability as an industry (I realize there are pockets of exception to this rule) to fully engage participants on the issue has, ultimately, led to the adoption of automatic plan designs that don’t require the participant to “do” anything other than write the check.

I have a more radical solution to the problem: Let’s make people sign up for their 401(k)—every year.

Before you spit up your morning beverage (apologies if it’s too late for that), hear me out. I will concede that signing up for a 401(k) plan can be a daunting task for a participant, and that it is already logistically challenging for employers (and advisers) to accommodate annual meetings for new workers. But consider this: Is it any more onerous than the annual decision(s) attendant with health-care plan enrollment?

Starting Blocks?

In many ways, the “automatic” solutions are a band-aid, at best. The Pension Protection Act’s automatic enrollment safe harbor requires only a 3% contribution from workers who don’t contribute actively, and steps that up by only 1% a year, and then only until it reaches 6%. That’s where many participants start contributing today, of course—and don’t tell me that an automatic enrollment program won’t turn some (perhaps many?) who today take the time to fill out the forms into defaulted savers in the future. Ironically, the PPA could actually serve to reduce some deferral rates, left unattended (see “Starting Blocks”).

Think those target-date fund defaults will fix poor asset allocation decisions? Perhaps for those that adopt them—but many (most?) plan sponsors seem only to be interested in adopting the change prospectively, doing nothing for those who are already enrolled in the plan. And the PPA’s safe harbor only requires prospective adoption for the automatic enrollment provisions.

Still, even if the PPA’s automatic solutions aren’t a perfect solution, even if they require some implementation oversight, why would I suggest that we make participants (and employers) undertake the painful process of enrollment every year?

I have long thought that the concept of saving for an ambiguous goal like “retirement” was just beyond the short-term comprehension of most people. Just about everything else we focus on has a much shorter term—we have annual budgets, monthly expenses, weekly meetings. Additionally, saving for retirement has largely been presented as something you need to do - - - someday. Most plans don’t allow for immediate eligibility (I appreciate the administrative rationale for some high-turnover workforces), and the vast majority of programs don’t even require that the 401(k) enrollment form be returned, much less completed (see “Participant Directives”). Contrast that with your workplace health-care program—the one you have to choose every year, and return the form—or have a program chosen for you.

Decision Points

Still, to say that an annual 401(k) enrollment is no more painful than health-care enrollment is not to say that it wouldn’t be painful. However, IMHO, an annual enrollment process could well lead to better decisions with these programs. Vanguard published a study on Roth 401(k) enrollment this week—and they found that the strongest correlating factor with participants choosing the Roth was being a new employee (see “Early Roth Adopters Are Active Retirement Savers”). This single attribute increased the probability of adoption by 3.2 percentage points on top of the normal 5% adoption rate—an increase of about 65%. Are these new workers smarter? I doubt it. Younger (and thus more likely to be enamored of the tax benefits of the Roth)? Perhaps, but age, while a factor, wasn’t the determinative factor—tenure was. Moreover, this result corresponded with the findings of another survey (also done by Vanguard) a couple of years ago that found some significant differences in asset-allocation choices—depending on when you joined the plan. These studies—and any number of others—suggest that, once most workers are “in,” they’re “done” making informed decisions about their retirement savings; the amount, the investment, the type. But they also suggest that, at the point of enrollment, participants are paying attention and are, in the aggregate at least, making decisions that seem reasonably informed.

Ironically, IMHO, the current solutions touted for engaging participants more seem mostly to rely on involving them less. That may be what they want—but I’m not convinced it’s what they need.

- Nevin Adams

When You Assume...

We live in an uncertain world, and when it comes to retirement planning, we are forced to make assumptions about an uncertain world some uncertain number of years in the future.

However, a recent white paper by JPMorgan Asset Management (JPMAM) calls to mind that old adage about what happens when one assumes (see Participant Behavior Matters in Target Fund Strategy).

First, retirement projection tools tend to overlook the reality that many, perhaps most, participants dip into their retirement savings from time to time: some for only awhile—JPMAM’s research found that 20% of participants borrow, on average, 15% of their account balance—and some forever. JPMAM’s data noted that a full 15% of those over the age of 59 ½ (the age when one avoids the 10% premature distribution penalty) withdraw, on average, a quarter of their account balance. The research, which looked at the behaviors of 1.3 million participants in some 350 plans recordkept by JPMorgan Retirement Plan Services, also found that the average participant withdraws over 20% of their account balance per year at, or soon after, retirement—not the even 4-5% drawdown implicit in most projections.

Additionally, most projections also tend to be optimistic about the rate of participant deferral. JPMAM found that, on average, participant deferral rates start at 6%—and stay there for a sustained period—increasing to 8% only by age 40, and not attaining 10% until age 55. More significantly, while most projections still contemplate annual pay increases, JPMAM found that, on average, people only get raises only every two of three years (and I’ll wager that, filtering out the occasionally distortive impact of averages, many aren’t seeing increases that often). Even more troubling—but a reality in an era of soaring health-care costs, rising fuel costs, and the economic squeeze being placed on the “Sandwich Generation”—is that, on average, 10% of participants lowered their rate of deferral—or stopped contributing altogether—each year!

Finally—though the JPMAM paper doesn’t touch on this—in this space, I have previously cast a doubtful eye on the rate-of-return assumptions often applied to participant investment patterns.

Optimistic Undercurrents

Now, there is an undercurrent of optimism associated with the Pension Protection Act—a confidence that its automatic enrollment safe harbor will usher more participants into the discipline of retirement saving; that the associated provisions on deferral acceleration will, over time, transform current savings rates to the requisite levels; that the application of professionally managed asset allocation funds as a default choice will impart a rational investment result to participant savings. Certainly these tools have the ability to modify some of the most egregious savings behaviors, and doubtless they will encourage some—perhaps a significant number—to come off the sidelines and begin a responsible preparation for retirement.

They’re not likely, however, to stem the premature drawdown of retirement savings, or to accelerate the pace or regularity of salary increases. In fact, it’s not beyond the realm of believability to envision how the adoption of these tools could, certainly in the short run, serve to reduce the rate of deferrals (participants auto-enrolled at the 3%, rather than the 6% rate they might have enrolled at if they had completed the form), and perhaps even decrease the rate of return (a more balanced portfolio might experience losses in the short-run that a stable-value-only portfolio might not).

What’s attendant upon us all in this emerging age of “automatic” solutions, IMHO, is to realize that they aren’t.

- Nevin Adams