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.

Markets Timing

As it happens, I’ll commemorate an anniversary of my birth this weekend.

It’s not a particularly significant one—it doesn’t end in a 5 or a 0, won’t trigger any new savings opportunities or impact (catch-up, RMD trigger, forbearance of withdrawal penalties, or Social Security)—but it is a birthday, and therefore a day upon which to reflect (and to wonder anew why we don’t make more fuss about our mothers, who—let’s face it—did the real work on that day).

Traditionally, on my birthday weekend (and the 4^th of July holiday), I have taken a look at my current asset allocations and, when circumstances warranted, rebalanced. There’s no magic to those points in time. It’s not the ONLY time I look (and act)—but it happens to be a time when, whatever is going on in the market, I have a calendar-driven opportunity to take a breath and take a longer view. And, let’s face it, this year has been a bumpy ride in the markets.

The mantra in times of volatile markets is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating. 

For me, anyway, this year will be a little different. Most significantly, as I near my “retirement” threshold, I’ll actually be shifting into a different pace of accumulation. And, for the first time in my working career, I will be doing it with my retirement savings accumulated into a single place (well, technically two—one for Roth, the other for the traditional pre-tax rollovers). That said, and my birthdate notwithstanding, I still have plenty of investment runway to ride.  

That said, and while my weekend should be a bit less structured than usual, here are some things I have traditionally done—that you, or those you support, may find useful—particularly with the current market uncertainties.      

Get started on rebalancing by changing the investment elections of NEW contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, compared to a year ago, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so—calendared events notwithstanding.

Better yet, consider shifting to a target-date fund or managed account. You may well be wondering why I would go to the “trouble” of manually rebalancing my 401(k) when there are professionally managed solutions available like target-date funds and managed accounts. The reality is that only one of my previous 401(k)s had target-date funds available on their menu[i]—and I have taken advantage of that regular rebalancing by professionals to some advantage.

None of this has to wait for a birthday, of course. But doing so on a regular basis can be an effective way to ensure that you get that retirement wish when you blow out the candles!

Nevin E. Adams, JD 

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[i] Another had a managed account option (that I didn’t care for).

Things You Don't Learn in School

Life has many lessons to teach us, some more painful than others—and some we’d just as soon be spared. But the graduates of 2021—well, they’ve been through a lot, arguably more than most—but with any luck at all, the days and years ahead will be brighter. 

Regardless, if you have a graduate—or if you are a graduate, here are some insights I’ve picked up along the way…   

ASAP is never as soon as people think.

Even those who work for themselves have bosses (they’re called “clients”).

Emails (generally) don’t have to be answered right this minute.

Bad news doesn’t improve with age.

Your first job can be like your first love—it will either bring a smile for years to come—or it can break your heart. And sometimes both.  

Don’t expect your job to respect personal boundaries without some “help.”

Don’t be afraid to pick up the phone.

If the only time your boss hears from you is when there’s trouble, don’t be surprised if they don’t look forward to your visits. 

Book some quiet time in your day.

Most meetings really could be replaced with an email.

You’re either early—or you’re late.

There is an inverse relationship between the number of people in a meeting and its productive output.

Everything you’ve heard about your elders isn’t true. But some of it is.

Generalizations are (almost) never accurate.

The world is made up of introverts and extroverts—learn and respect the difference(s).

Just because you’re young(er), people are going to assume you know things you don’t—and assume you don’t know things you do.

A picture may be worth a thousand words, but sometimes it pays to read the fine print.

Never say you’ll never…

Always sleep on big decisions.

Never let your schooling stand in the way of your education.

Sometimes the grass on the other side looks greener because of the amount of fertilizer applied.

Never miss an opportunity to say, “thank you.”

If you wouldn’t want your mother to learn about it, don’t…

Comments that begin “with all due respect” generally aren’t.

Sometimes the questions are complicated, but the answer isn’t.

That 401(k) match isn’t really “free” money—but it won’t cost you a thing.

And most of all, don’t forget that you’ll want to plan for your future now—because retirement, like graduation, seems a long way off—until it isn’t.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

p.s.: Got any advice to add to this list? Share it in the comment section below!

5 Things Your Retirement Can (Still) Learn From Game of Thrones

Whether you are a Game of Thrones aficionado – or haven’t watched a single episode – there are lessons to be learned nonetheless.

Last week I recounted some fiduciary admonitions from the HBO series. Turns out there are words of wisdom for individual retirement savers as well. Check these out.

“When you play the game of thrones, you win or you die. There is no middle ground.”

All the way back in Season 1, Cersei Lannister explained what has certainly been a theme for the series as a whole. That said, retirement isn’t a game of thrones, nor is it precisely a “win or die” scenario. We all die, eventually of course (no “wights” here), but there are those who “win,” at least if you consider those who have sufficient resources to fund retirement as “winning.”

The non-partisan Employee Benefit Research Institute (EBRI) has previously found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers – between 83% and 86% of them, in fact – with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold – and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

When EBRI recently looked at an individual basis, the average Retirement Savings Shortfall for those ages 60–64 ranges from $12,640 per individual for widowers to $24,905 for single males and $62,127 for single females. Those looking for a big boost in the odds of success could find it in eligibility for a defined contribution plan. Consider that the average retirement deficit for individuals ages 35-39 with no future years of eligibility in a defined contribution plan is $78,046 per individual – more than five times the average retirement deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan (where the average retirement deficit is $14,638).

Not that there isn’t plenty to worry about: reports of individuals who claim to have no money set aside for financial emergencies; the sheer number of workers entering their career saddled with huge amounts of college debt – and the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work… and those important years of eligibility.

“A Lannister always pays his debts.”

While the official motto of the Lannister house is “Hear me roar!”, at several points throughout the series, the Lannisters are able to trade on their reputation for, by hook or by crook, fulfilling their debt obligations (though note, such “debts” are not always monetary in nature).  

Debt of any kind – and these days student debt seems to loom largest – certainly weighs on thinking, if not saving, for retirement. While younger workers’ balance sheets are clearly hurt by student debt, researchers have noted preliminary results that indicate that they do not substantially reduce retirement saving to compensate. Good news for their long-term prospects, anyway.

However, note that nearly two in three workers (63%) say debt is a problem for them, and the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey has consistently found a relationship between debt levels and retirement confidence. In 2018, just 2% of workers with a major debt problem say they are very confident about having enough money to live comfortably in retirement, compared with a third (32%) of workers who indicate debt is not a problem – while 37% of workers with a major debt problem are not at all confident about having enough money for a financially secure retirement, compared with 6% of workers without a debt problem.

Now, confidence is one thing; reality is another. Paying off debt – or avoiding racking up serious amounts of it in the first place – is the wisest course when it comes to retirement preparations. But, as Tyrion Lannister observed in Season 3, “I’m quite good at spending money, but a lifetime of outrageous wealth hasn’t taught me much about managing it.”

”If you think this has a happy ending, you haven't been paying attention.” 

Ramsay Bolton’s Season 3 admonition to Theon Greyjoy (soon to be Reek, several seasons ahead of his eventual redemption) predicated what was surely one of the more uncomfortable sequences (certainly for Theon) – and proved to be prescient for viewers as well.

It is an observation that many retirement industry professionals would surely direct at the individuals that any number of consumer surveys suggest have set aside little or worse – nothing – not only for retirement, but for the relatively commonplace financial emergencies that seem to be part and parcel of life. Granted, some doubtless are living “paycheck to paycheck” not by choice, but necessity.

And yet, there’s plenty of evidence to suggest that these behaviors aren’t always constrained by economic reality, but by a very human inclination to sacrifice the long-term view for the exigency of today’s pleasure(s), if not an unhealthy confidence that the future will bring opportunities to remediate today’s decisions.

“The Lannisters send their regards.”

Game of Thrones may not have invented the notion of surprisingly (if not randomly) killing off key characters, but the series has arguably taken it to a whole new level. For my money, even in a series well-known for its plot twists, unanticipated shifts of loyalty and sheer mayhem, there’s nothing quite like the episode titled “The Rains of Castamere,” but more commonly known to fans as the “Red Wedding.”

We’ve all been to at least one wedding where the underlying tensions between families threatened to undermine the happiness generally associated with such proceedings, but I think it’s fair to say that the wedding of Edmure Tully and Roslin Frey had a conclusion far more dramatic than its participants (or viewers) anticipated (unless, of course, you read the book). That said, it’s not as though the Starks didn’t have a premonition about the trouble that would ultimately befall them. It’s just that, ultimately, they relied upon a certain amount of social decorum to prevail. Suffice it to say that the “decorum” that accompanied Roose Bolton’s infamous quote above wasn’t what the Starks had in mind.

The lesson for retirement savings is, of course, that it’s always prudent to be prepared in case planned events take an unexpected turn. That could come in many forms: an unexpectedly early retirement, a sudden illness or disability, a need to provide parental support, or even a sharp, sustained downturn in the markets.  

It might be a good time to check out “6 Things that Can Wreck a Retirement."

“Winter is coming.” 

This is perhaps the most iconic phrase from GoT, and while those who live in climates where the arrival of winter can mean significant change – snarled commutes, cancelled flights, or perhaps trips to the ski slopes – in the Game of Thrones it’s unequivocally a bad thing, though – as in making retirement preparations – there are some who think that arrival is further off than it actually turns out to be.

Retirement – or perhaps more precisely, the end of a full-time working career – though it’s often depicted with scenes of warmth and beaches – is “winter” of a sort, or might be if adequate preparations aren’t made. While there are varying degrees of concern about that impact, and the timing of that impact, it seems fair to note that Americans know that retirement, like winter in GoT, is coming.

Those who haven’t are well advised to bear in mind Tyrion Lannister’s caution, “The day will come when you think you are safe and happy, and your joy will turn to ashes in your mouth.”

Better counsel comes from Petyr Baelish, who in Season 6 noted, “The past is gone for good. You can sit here mourning its departure, or prepare for the future.” Because, as that same Petyr Baelish explains in Season 4, “a lot can happen between now and never.”

And here’s hoping it does – because it certainly can.

- Nevin E. Adams, JD

A Matter of Time

Preparing for retirement inevitably brings up questions of time: When will you retire? How long will your retirement last? How long do you have to prepare? Often we don’t take advantage of the time we have, and sometimes we don’t have the time we thought we would.

It was just five years ago this week that my wife and I, having just deposited my youngest off for his first semester of college, spent our drive home up the East Coast with Hurricane Irene (and the reports of her potential destruction and probable landfalls) close behind.

We arrived home, unloaded in record time, and went straight to the local hardware store to stock up for the coming storm. As you might imagine, we weren’t the only ones to do so. And what we had most hoped to acquire (a generator) was not to be found — there, or at that moment, apparently anywhere in the Nutmeg State.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall in Connecticut was relatively unique, we had, on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator — but, as human beings are inclined to do, thinking that I had plenty of time to do so (and when it was more convenient), I simply (and repeatedly) postponed taking action.

That uncertainty came home in a very different way to me this past week, with word of the passing of a colleague, just 55. She had spoken of retiring “early” so as to be able to spend more time with her young daughter — hoping to catch up on some of the family time she had perhaps missed due to the obligations of a professional career, or maybe just doing some of the relaxing and travelling that always seem to fall prey to the pressures of everyday life. Tragically, while riding her bike, of all things, this dear lady — a two-time cancer survivor — was struck and killed by a car.

We never know how much time we’ll have — to work, to live, to save, to prepare for the time we have left, to say and do the things we always mean to say and do.

Ultimately, of course, what matters isn’t the time you have, it’s what you do with it.

- Nevin E. Adams, JD

How the Class of 2020’s Retirement Plans Will Be Different

Each year the good folks at Beloit College produce a “Mindset List” providing a look at the cultural touchstones that shape the lives of students about to enter college. So, in what ways will their retirement plans differ from those of their parents?

In the most recent list (they’ve been doing it since 1998), the Beloit Mindset List notes that for the class of 2020 (among other things):

• There has always been a digital swap meet called eBay.
• They never heard Harry Caray try to sing during the seventh inning at Wrigley Field.
• Vladimir Putin has always been calling the shots at the Kremlin.
• Elian Gonzalez, who would like to visit the U.S. again someday, has always been back in Cuba.
• The Ali/Frazier boxing match for their generation was between the daughters of Muhammad and Joe.
• NFL coaches have always had the opportunity to throw a red flag and question the ref.
• Snowboarding has always been an Olympic sport.
• John Elway and Wayne Gretzky have always been retired.

So, what about their retirement plans? Well, for the Class of 2020:

• There have always been 401(k)s.
• They’ve always had a Roth option available to them (401(k) or IRA).
• They’ve always worried that Social Security wouldn’t be available to pay benefits (in that, they’re much like their parents at their age).
• They’ve always had a call center to reach out to with questions about their retirement plan.
• They’ve never had to wait to be eligible to start saving in their 401(k) (their parents generally had to wait a year).
• They’ve never had to sign up for their 401(k) plan (their 401(k) automatically enrolls new hires).
• They’ve never had to make an investment choice in their 401(k) plan (their 401(k) has long had a QDIA default option).
• They’ve always had fee information available to them on their 401(k) statement (it remains to be seen if they’ll understand it any better than their parents).
• They’ve always known what their 401(k) balance would equal in monthly installment payments.
• They’ve always had an advisor available to answer their questions.

Most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively.

- Nevin E. Adams, JD

3 Things Retirement Savers Can Learn from Pokémon Go

If you’re a Millennial (or know one), you’ve surely heard about (or seen in action) the recent outbreak of Pokémon Go.

It’s not even a week old, but it’s quickly dominating social media. If you’ve managed to avoid the media barrage, it’s a new (free) interactive online game that builds on the basics of the Pokémon card and video games past – catching Pokémon, battling at Gyms, using items, evolving your creatures. These creatures (151 unique ones at present) have even been spotted hanging out with a certain renowned ERISA attorney (see below)!

The object of the game is to find these Pokémon (they’re fictional animals – the name is said to be from a contracted Romanization of the Japanese Poketto Monsuta, a.k.a. “pocket monsters”), and then catch them, by throwing a sphere called a Pokéball in their general direction, after which they can grow via battles with other Pokémon in Gyms, and then do battles with still yet more Pokémon in Gyms, etc. All of which is to the benefit of their trainer – you. With Pokémon Go, players can download the free app, then head outdoors using a GPS map in search of Pokémon, using their camera to view creatures “in the wild” and capture them.

Now that we’ve gotten you up to speed on the basics, here are some things that will help you in Pokémon Go and saving for retirement.

Your odds improve if you take action.

Though video games have long been criticized for keeping young players indoors, Pokémon Go draws players out into the real world. You can find “wild” Pokémon by physically walking around your area, and looking near what are called “PokéStops,” which tend to be tourist spots, malls or even churches. If you’re looking to hatch some Pokémon eggs, you have to walk to do that as well! You can play it without going outside, but you won’t do nearly as well.

Pokémon character (left) and human ERISA attorney (right)

Lots of workplace retirement plans still rely on voluntary enrollment, which is to say you have to fill out a form to join the plan. Unfortunately, in those plans, if you don’t sign up, you don’t participate.

A growing number of plans do provide for automatic enrollment, which means that you get signed up for the plan unless you fill out a form to opt out. That’s a good thing for folks who are busy, lazy, or are simply befuddled by the choices that you have to make with a voluntary plan (how much to save, how to invest it, who you’d like your beneficiary to be). However, there is a catch: Most of the automatic enrollment plans assume that a 3% contribution from your pay. And, regardless of your pay level or age, that’s almost certainly not going to be “enough” to provide a financially secure retirement.

Said another way, it’s not very “evolved” thinking…

Contributing more can get you to the finish line faster.

Pokémon Go is free – and you don’t need to spend a cent to pick up Pokémon, battle them, accumulate points, and even hatch the new ones. That said, we lead busy lives (yes, even those who find time to play Pokémon Go), and for those who want to get “there” faster, there are ways to do so by spending a little money.

There is, as you might expect, a shop where you can purchase all manner of coin bundles for real-world cash, which can then be traded for Pokémon-luring Incense, more Pokéballs and a few other things. If you’re in a hurry to “catch ‘em all!” And would rather spend money than time.

Saving for retirement doesn’t have to be a big financial commitment (depending on how much you need, and how long you have to save), though it can be if you put it off, or don’t establish a goal that suitable for the amount you need and the time you have to set it aside. Those who would like to get to that point sooner can, of course, “spend” more on retirement by setting aside larger contributions, sooner.

Every so often you need to look where you’re going.

Apparently one of the dangers of the new Pokémon Go is that game players have been spotted looking at nothing but their smartphone screens while they walk around looking for new Pokémons. This even when they are crossing highways, walking over bridges, travelling near bodies of water or – in at least one case – frequently empty parking lots where individuals looking to separate them from their money have been lurking. The bottom line – players are advised to be aware of their surroundings as they search for Pokémon.

When it comes to saving for retirement, whether you’re in an automatic enrollment plan (where the initial investment decision is likely made for you, and directed to a target-date fund), or a voluntary enrollment plan (where you may have made the initial decision, perhaps with some help, but probably haven’t looked at it in a while), those initial investment decisions – however ably made – should be revisited from time to time, at least once a year. The markets are always moving, after all – and that perfect choice of investments has likely shifted over time.

More importantly, you need to keep an eye on how your total savings is adding up to your retirement savings goals, and perhaps make adjustments to the amount you are saving.

After all, even if you get off to a good start, if you don’t look where you’re going, it’s easy to wander off the path and find yourself in trouble.

- Nevin E. Adams, JD

A Retirement Industry Thanksgiving List

Thanksgiving is a special time of year — and one on which it seems fitting to reflect on all for which we should be thankful. Here’s my 2015 list:

I’m thankful that so many employers voluntarily choose to offer a workplace retirement plan — and that so many workers, given an opportunity to participate, do.

I’m thankful that so many employers choose to match contributions or to make profit-sharing contributions (or both). Without those matching dollars, many workers would likely not participate or contribute at their current levels — and they would surely have far less set aside for retirement.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful that trends that suggest that more plan sponsors are extending those mechanisms to their existing workers as well as new hires.

I’m thankful for qualified default investment alternatives that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful and on-going review of those options by prudent plan fiduciaries.

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing economic interests, such as rising health care costs and college debt.

I’m thankful that the federal government remains willing to postpone taxing pay that Americans postpone taking (and spending) by saving for retirement.

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax “preferences” — even if governmental accountants and certain academics remain oblivious.

I’m thankful that the “plot” to kill the 401(k)… hasn’t. Yet.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many, particularly those among our membership, take the time and energy to provide that input. I’m hopeful, particularly in areas like the fiduciary proposal, that the final product will reflect that input.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes. I’m thankful for the ability to take to task here research that doesn’t live up to those objective standards.

I’m thankful for the warmth with which readers and members, both old and new, continue to embrace the work we do here. I’m thankful for all of you who have supported — and I hope benefited from — our various conferences, education programs and communications throughout the year. I’m thankful for the constant — and enthusiastic — support of our Firm Partners and advertisers.

I’m thankful for the team here at NAPA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers like you.

Here’s wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

"Better" Business

It has become something of a truism in our industry that defined benefit plans are “better” than defined contribution plans. We’re told that returns are higher(1) and fees lower in the former, that employees are better served by having the investment decisions made by professionals, and that many individuals don’t save enough on their own to provide the level of retirement income that they could expect from a defined benefit pension plan. Even the recent (arguably positive) changes in defined contribution design—automatic enrollment, qualified default investment alternatives, and the expanding availability of retirement income options(2)—are often said to represent the “DB-ification” of DC plans.

However, a recent analysis by EBRI reveals that DB is not always “better,” at least not defined as providing financial resources in retirement. In fact, if historical rates of return are assumed, as well as annuity purchase prices reflecting average bond rates over the last 27 years, the median comparisons show a strong outcome advantage for voluntary-enrollment (VE) 401(k) plans over both stylized, final-average DB plan and cash balance plan designs.(3)

Admittedly, those findings are based on a number of assumptions, not the least of which include the specific benefit formulae of the DB plans, and the performance of the markets. Indeed, the analysis in the June EBRI Issue Brief takes pains not only to outline and explain those assumptions,(4) but, using EBRI’s unique Retirement Security Projection Model® (RSPM) to produce a wide range of simulations, provides a direct comparison of the likely benefits in a number of possible scenarios, some of which produce different comparative outcomes. While the results do reflect the projected cumulative effects of job changes and things like loans, as well as the real-life 401(k) plan design parameters in several hundred different plans, they do not yet incorporate the potentially positive impact that automatic enrollment might have, particularly for lower-income individuals.


Significantly, the EBRI report does take into account another real-world factor that is frequently overlooked in the DB-to-DC comparisons: the actual job tenure experience of those in the private sector. In fact, as a recent EBRI Notes article(5) points out, the data on employee tenure (the amount of time an individual has been with his or her current employer) show that so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years. Even with today’s accelerated vesting schedules, that kind of turnover represents a kind of tenure “leakage” that can have a significant impact on pension benefits—even when they work for an employer that offers that benefit, they simply don’t work for one employer long enough to qualify for a meaningful benefit.

So, which type of retirement plan is “better”? As the EBRI analysis illustrates, there is no single right answer—but the data suggests that ignoring how often people actually change employers can be as misleading as ignoring how much they actually save.

Nevin E. Adams, JD

(1) In the days following publication of the EBRI Issue Brief, (“Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans,” online here),  a number of individuals commented specifically on the chronicled difference in return in DB and DC plans; outside of some exceptions in the public sector, DB investment performance generally has no effect on the benefits paid.

(2) A recent EBRI analysis indicates that, even in DB plans, the rate of annuitization varies directly with the degree to which plan rules restrict the ability to choose a partial or lump-sum distribution. See “Annuity and Lump-Sum Decisions in Defined Benefit Plans: The Role of Plan Rules,” online here.

(3) While the DC plans modeled in this analysis draw from the actual design experience of several hundred VE 401(k) plans, in the interest of clarity it was decided to limit the comparisons for DB plans to only two stylized representative plan designs: a high-three-year, final-average DB plan and a cash balance plan. Median generosity parameters are used for baseline purposes but comparisons are also re-run with more generous provisions (the 75th percentile) as part of the sensitivity analysis.

(4) The report notes that a multitude of factors affect the ultimate outcome: interest rates and investment returns; the level and length of participation; an individual’s age, job tenure, and remaining length of time in the work force; and the purchase price of an annuity, among other things.

(5) The EBRI report highlights several implications of these tenure trends: the effect on DB accruals (even for workers still covered by those programs), the impact of the lump-sum distributions that often accompany job change, and the implications for social programs and workplace stability. “See Employee Tenure Trends, 1983–2012,” online here.

Predict-Able

Retirement planning is a complex and highly individualized process, but many people find it easier to start by focusing on a single, specific target number.

For those interested in a single number for health care expenses in retirement, a recent EBRI report provides that. Among other things, the report noted that a 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover their projected health care expenses in retirement. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses.¹

Determining how much money is needed to cover health care expenses in retirement is complicated. It depends on retirement age, the length of life after retirement, the availability and source of health insurance coverage after retirement to supplement Medicare, the rate at which health care costs increase, interest rates, market returns, and health status, among other things. That said, it is possible to project health care expenses with some accuracy, and EBRI’s recent analysis uses a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement.

However, those recent “single number” projections specifically excluded the financial impact of long-term care.

EBRI has long acknowledged the critical impact that health care expenses can have on retirement finances, and considering that EBRI has long incorporated both the costs of health care and long-term care in its Retirement Savings Projection Model® (RSPM), one might well wonder why this particular report specifically excluded those long-term care projections.

For all the complexity in those calculations, the reality is that everyone won’t have to deal with the expenses associated with long-term care. For those who will, the impact on retirement finances could be significant, even catastrophic.² That’s why EBRI has modeled their impact in the RSPM since 2003.

As noted above, for those interested in a single number, the recent EBRI report provides that, along with variations that permit one to take into account different likelihoods of success and gender/marital combinations. We are able to do that because we treat longevity risk and investment risk stochastically,³ and the fact that those expenses (and the costs of insurance) are, at least relatively, predictable.

But while it is possible to come up with a single number that individuals can use to start setting retirement-savings goals, it is important to bear in mind that a single number based on averages will be wrong for the vast majority of the population—and that those who rely exclusively on that single number run the risk of running short.

Nevin E. Adams, JD

¹ Unlike reports produced by a number of organizations, the EBRI report also provided estimates for those interested in a better-than-50-percent chance of success. See ”Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News,” online here.

² The EBRI Notes article above illustrates the difference: If you ignore the impact of nursing home and home health care expenses, more than 90 percent of single male Gen Xers were projected to have no financial shortfall in retirement—but when that impact was included, just 68 percent of that group was projected to have no financial shortfall in retirement. The error of ignoring nursing home and home health care costs is even more profound if one focuses on the percentage of individuals with shortfalls in excess of $100,000.

³ For an expanded description of the difference stochastic modeling can make, see “Single Best Answer.”
See also: “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997-2010”, and “Effects of Nursing Home Stays on Household Portfolios.”

Halfway, Honed

Last week we published¹ the results of an update of EBRI’s Retirement Readiness Rating from the Retirement Security Projection Model® (RSPM). That model, which has been modified over the years to take into account certain structural and market changes,² projects that more than half (56 percent) of Boomers and Gen Xers will be able to retire with enough money to cover the cost of basic retirement needs as well as uninsured health care costs, including stochastic expenses from nursing home and home health care.³

On the other hand, that same model projects that about 44 percent won’t have “enough” to cover those expenses.

It’s worth noting that the trends are positive. Even after the toll of the 2008 financial crisis, the 2012 number of those at risk of running short is some 5−8 percentage points “better” than what was found in 2003. Moreover, the analysis is able to point to some important trends; eligibility for a workplace retirement plan remains a significant factor in reducing the risk of running short⁴, while the more recent broad-based advent of automatic enrollment plan designs makes it ever more likely that those eligible to participate—particularly lower-income workers—do so.

The research does point out that lower-income households are much more likely to be at risk for insufficient retirement income,⁵ even though basic retirement expenses are modeled as a function of the household’s expected retirement income. In fact, the 2012 baseline ratings for Early Boomers range from a projection that 87 percent of the simulated lifepaths for the lowest-income households are at risk in retirement to only 13 percent of retired highest-income households.

Obviously, the reality of more than 4 in 10 Americans not having sufficient post-retirement wealth is of concern, though I find that many are pleasantly surprised at how high a percentage is expected to have sufficient assets. Indeed, whether one draws comfort from that finding likely depends on your expectations (and perhaps on which side of that line you think you might find yourself post-retirement).

Regardless of those expectations—and whether you find the picture to be one of a glass half full or half empty—the data give us all something to work with, and to work toward.

- Nevin E. Adams, JD

¹ EBRI Notes May 2012, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,®” online here. http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5062

² The Retirement Security Projection Model® (RSPM) was developed in 2003, and in 2010 it was updated it to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010.

A household’s simulated lifepath in retirement is considered to be at risk in the baseline version of the model if its aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures, defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) as well as some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care (at least until the point such expenses are picked up by Medicaid). The resources in retirement are assumed to consist of Social Security (status quo benefits for the baseline version of the simulation); account balances from defined contribution plans; individual retirement accounts (IRAs) and/or cash balance plans; annuities or lump-sum distributions from defined benefit plans; and net housing equity (in the form of a lump‐sum distribution at the point that other financial resources are exhausted). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates and other thresholds.

⁴ For an idea of just much of an impact plan eligibility makes, consider that, according to the simulation results, Gen Xers with no future years of eligibility would run short of money in retirement 60.7 percent of the time, whereas fewer than 1 in 5 (18.2 percent) of those with 20 or more years of future eligibility would run this risk.

⁵ In addition to underlining the importance of automatic enrollment for the lowest income, this also underlines the importance of Social Security as a post-retirement income source for this group.