Time Magazine complains about how people do not have enough money in their 401(k) accounts to retire. The problem here is that people do not want to save. They want to spend now. Time is basically saying that humans can't be trusted to save for their own future. That's certainly true of a large fraction of the populace. But what to do about it if anything?
The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that's little help for those who retired — or were forced to — during the recession. In a system in which one year's gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.
My reaction can be summed up with "as compared to what?". The money in 401k's is not enough. Okay, fine, The biggest alternative one can point to is pension funds for government employees. Those government employee pension funds are a disaster waiting to happen. Politicians over-promised and under-funded.
Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.
Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns.
"The amount that needs to be made up is enormous," said Peter Austin, executive director of BNY Mellon Pension Services. "Frankly, they are forced to continue their allocation in these high-return asset classes because that's their only hope."
People can't be trusted to save for themselves. But governments can't be trusted to save for you. Okay, got a third idea in mind? Corporate pensions could make a come-back. But corps would need an incentive for bringing them back: prospective employees of corps would need to assign a bigger weighting to the pension plan when choosing a job. Good luck with that one.
People are going to need to work longer and save more. Increase your pension fund contributions. If you are an American then open an IRA or similar account if you do not already have one and set up automatic deposits into it.
Even under unrealistic optimistic assumptions the state of Virginia's major pension funds are grossly underfunded. No way are public pension funds an example to follow.
But Virginia officials now estimate the funding level of its major pension funds will sink to about 60 percent by 2013.
From there, the deficit will grow even wider, according to Kim Nicholl, the national director of PricewaterhouseCoopers public sector retirement practice. Even if public pension funds were to hit their 8 percent investment targets every year, Nicholl calculated they would have less than half of what they need by 2025. This is because a greater share of the population will be retired and those who are will live longer, thus collecting benefits longer, she said.
Hey, big government pension funds have professional managers. But they still lost big when the market went down. Also, legislatures do not fund the pension programs well enough. What to do? Cut benefits. Make people work longer. These measures are coming. Do not plan on retiring whenever your current pension planning makes you think you can retire.
I think the real picture is far worse than the above describes. The assumption is that the economy will grow and increase the value of stocks. But what happens if Peak Oil makes the economy shrink? The holes in pension plans then become massive. I expect that to happen. My advice: Live on less, work harder, save more, work longer. Find ways to earn extra income.
This study evaluated the changes in Medicare beneficiaries' health care spending between 1997 and 2003, and found beneficiaries spent a growing share of their income on health care.
The results showed that median out-of-pocket health spending increased from 11.9% of income in 1997 to 15.5% in 2003, and about four in 10 beneficiaries spent at least one-fifth of their income on health care in 2003. Researchers using data from the Medicare Current Beneficiary Survey found that growth in out-of-pocket health spending outpaced growth in income over time.
Old folks are experiencing a higher rate of inflation than the public as a whole. Old folks are a rising percentage of the total population. So the aging of the population increases inflationary pressures on the economy.
A rise in retirement ages would cause many aging people to pay taxes for longer, thereby easing the financial crunch on taxpayers to support old folks. Also, the longer people are employed the more of their medical costs will get paid by employer health benefits.
Even those cost of living adjustments won't be enough to keep me whole, though, because inflation rises faster for the elderly than it does for the rest of the population. The Labor Department's Bureau of Labor Statistics has been computing the consumer price index-E (for elderly) with figures going back to December 1982. What they show is that through September 2007, the CPI-E had increased by 124.9 percent compared with a 108.1 percent increase in the CPI-W (for working).
The reason is that the elderly spend more of their income on the component of the CPI that is going up fastest -- medical care. According to the CPI-E, as of the end of 2006, the elderly spent more than twice as much of their income on medical costs as wage earners. And compared to a 29.7 percent increase in the cost of all items in the CPI-E for the 10 years ending in December 2006, the cost of medical care went up by 47.8 percent. The one category that has gone down in price over the past 10 years is apparel, which the elderly buy relatively less of than workers, which means they benefit less from that decline in prices.
When planning for retirement you really need to look at your own likely inflation profile. If you live in an area with rapidly rising housing prices you might get hit by rising property taxes. Though on the bright side your house will become worth more. Also, if you live in a cold rural area you'll be harder hit by rising oil prices for transportation (you'll drive further than an urban dweller) and heating (both heating oil and natural gas prices will rise).
When you are ready to retire think about moving to a place where you will suffer less inflation. For example, heating fuel price inflation can be reduced in a number of ways. Move to a warmer climate or a well insulated house or a house with large wooded lot which can supply fuel to a large wood burning stove. Also, choose an area of the country which has lower medical costs. A more densely populated area and a house near stores can reduce transportation costs.