‘Scare’ Tactics

 Could someone please explain to me why the retirement industry keeps publishing ridiculous, uninformed and often ludicrous notions of retirement income needs?

Honestly, I have no earthly idea what value any rational thinking person would attach to the guesses that an uninformed public makes about retirement income needs. But then why any credible source would take those guesses and then AVERAGE them (cause you know how much more accurate an average is[i]) for publication is — well, it’s the kind of thing that makes my head hurt (particularly after repeated banging of my head on a table after reading another).

The latest I stumbled across came from BlackRock, which — based on a survey of “1,000 national registered voters in the United States” — declared that $2.191 million is the “average expected amount of savings needed for retirement.”

Seriously?

No wonder among that same group just 22% were deemed to be “extremely or very confident they will have enough money to live on throughout their retirement years.” I’m surprised it was that high.

Speaking of high, take just a second and apply the 4% drawdown “rule” to that wild-eyed estimate, and you’d find that produces $87,640 in annual income — on top of Social Security! Think people could muddle by on THAT?

Sadly, the sponsors of this survey have the ability to shrug, and say “well, that’s what people think.” But shouldn’t knowledgeable people in this industry have a responsibility to call “BS” on that kind of crazy assumption? 

Unfortunately, there’s not even a footnote here to suggest anything other than the perceived need is real — juxtaposed, I should add by the numbers this same (likely equally misinformed) group puts forth as the amount of savings they have.    

Look, BlackRock is not the only — and probably not the last — to put forth this kind of nonsense. Northwestern Mutual did so last April — even having the temerity to label it a “magic” number (though they “only” said it was $1.46 million). This being an annual “event” of theirs, I’m sure an “update” is forthcoming. More’s the pity. 

One assumes that the purveyors of these data points see it as a “wake up” call to folks, a motivation. But I think this “scare tactic” — there’s really no other word for it — is more likely just another sign to regular folks that they’ll NEVER manage to reach it — and surely some, perhaps most, just give up, or don’t even try in the first place. Not to mention the encouragement it doubtless provides to those who want to proclaim the system is “broken.”

What people think they’ll need is one thing — but I would argue that we have a responsibility to help them understand what they really need. 

And it’s not exaggerated, uninformed “scare tactic” guesses.

• Nevin E. Adams, JD

 

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[i] Averages are easy math — but misleading. In this case that average tells us nothing about the relative breakdown on age brackets, incomes, where they live, their health, etc.  What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

Uncertain Outcomes

As the nation enters its third month under the constraints of the COVID-19 pandemic, it seems a dramatic understatement to say we are living in uncertain times.

Let’s face it, even as the nation begins to (re)open, concerns about the coronavirus remain widespread, and the markets, though stabilizing, remain volatile. Unemployment rates, though optimism remains that they will be short-lived, are at levels not seen since… well, at levels never seen before. And then, in the midst of all this, as a nation, we are reeling from a fresh wound—the tragedy and implications of George Floyd’s death—and while many are hopeful that meaningful change can finally come from this, there’s sadness—and anger—that the protests calling for that change have been accompanied by acts of violence.

Amidst all this worry and uncertainty, it’s hard to believe that the CARES Act—and the Payroll Protection Program—have only just been drafted, executed, and implemented to help stave off at least some of the economic uncertainty that currently confronts many. Not to mention that we had only just begun getting our arms around the practical implications of the SECURE Act—which incorporated retirement provisions that purported to stave off future economic disaster.

The mortality and hospitalization projections related to COVID-19 have perhaps provided a fresh appreciation for both the importance, and the limitations, of models as a predictor of the future impact of current decisions. That said, those seeking to forestall problems are generally well advised to rely on something other than a “gut sense” of the potential impact.

Earlier this year the Employee Benefit Research Institute (EBRI) projected the potential impact of the key provisions[i] of the SECURE Act. EBRI projected that those projections could  reduce the U.S. retirement deficit for workers currently age 35-39 by as much as 5.3%—double that if they work for small employers (those less than 100 employees), mostly because those who are in the latter category are so much less likely to have access to a retirement savings plan at work—and, as readers of our publications know, those without access to a plan at work are significantly less likely to save for retirement—12 times less likely, in fact.

However, the overall impact of these SECURE provisions is larger; those specific projections merely quantify the reduction in shortfalls for those who otherwise wouldn’t have enough retirement income.
Among those who were already deemed to have had “enough” retirement income (and EBRI employs a fairly conservative basis for that foundation, one based on actual estimated needs, rather than an ad hoc percentage of pre-retirement income), SECURE almost certainly adds some cushion to those projections. Indeed, the EBRI report differentiates between reductions in deficit and increases in surplus.

When You Assume…

Those are encouraging numbers. But it’s worth acknowledging that there’s a healthy dose of assumptions underlying those projections, as surely there must be in anticipating future human behaviors. EBRI’s Research Director (and data modeler extraordinaire) Dr. Jack VanDerhei takes pains to outline those in the paper, but it’s worth noting that the ranges in assumptions employed are—well, they’re all over the place.

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Consider that in the EBRI report, the assumptions presented for MEP adoption range from a one-third take-up by employers with no participant opt-out to one in which two-thirds of employers who do not currently offer a plan choose to do so, with a 25% opt-out rate by workers. And, as you might imagine, the results vary widely based on the assumptions used. On the other hand, they’re arguably no different than if you were to ask a random group of advisors how many more employers will now offer plans because of changes like the greatly expanded start-up tax credit, or as a result of the efficiencies resulting from an open MEP.

Now, unlike many of the uncertainties in our lives, when it comes to retirement, advisors can make a difference—and potentially a huge difference in the SECURE Act realities, whether it’s by informing and encouraging employers to take action, nudging them toward positive and proactive plan designs, or simply working with individual workers to help them maximize the expanded opportunities. In sum, we can all have an impact far beyond our immediate circle—and beyond our lifetimes.

We live in uncertain times, after all—but the importance of the role you  play in expanding retirement opportunity and security—and our nation’s future—is anything but…

- Nevin E. Adams, JD

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[i]Specifically, the projections contemplate greater access by allowing providers to offer multiple employee plans (MEPs), and also factor in the impact of raising the cap under which plan sponsors can automatically enroll workers in “safe harbor” 401(k) plans from 10% to 15% of wages, and required coverage of long-term part-time employees.