Why Do We Still Have a Retirement Crisis?
In celebration of its 70th anniversary, the Financial Analysts Journal published a special retrospective issue focusing on retirement security. As one of the six areas of focus of the CFA Institute Future of Finance initiative, retirement security is, perhaps now more than ever, an important and timely topic for investors and their clients.
FAJ Editor Barbara S. Petitt, CFA, had the chance to talk with Laurence B. Siegel, who served as the guest editor for this anniversary issue. Siegel combed through the FAJ archives for the most relevant articles to feature. He also provided a guest editorial and contributed an article.
In his guest editorial, “After 70 Years of Fruitful Research, Why Is There Still a Retirement Crisis?,” Siegel cogently addresses the retirement issues that still plague us today.
“The reason that we have a retirement crisis is that it’s hard to save money,” Siegel said. “And it’s hard to save the very large amounts of money needed for a long retirement with the greater longevity that exists in today’s world.”
Different people want and should have access to different retirement solutions, he argues. Retirees should build income guarantees by choosing the pension plan that best meets their individualized needs.
Along with classic retirement research from the FAJ archives, the anniversary issue features a new article by Siegel and his coauthor, M. Barton Waring, “The Only Spending Rule Article You Will Ever Need.” Siegel and Waring call their proposed spending rule an “annually recalculated virtual annuity.” Each year, one should spend (at most) the amount that a newly purchased annuity would pay out in that year. The purchase price of the annuity is equal to the then-current portfolio value and priced at current interest rates and number of years of required cash flows remaining. By providing investors with consumption that fluctuates with asset value, the annually recalculated virtual annuity guarantees that they will not run out of money.
Despite this abundance of solid research, the message about the retirement crisis still seems to have largely been ignored. Is there a collective call to action to prevent us from repeating history’s mistakes? In this interview with Petitt, Siegel puts forth two suggestions.
“The first thing we can do collectively is save more — recognizing that the rate of return that you earn on your investments is not nearly as important as the size of the investment to begin with,” he said. “The second thing we need to do collectively is to support efforts to rationalize the system of pensions and savings in whatever country we happen to live in.”
For more insights on the retirement crisis and on research that proposes salient, practical solutions, listen to the full interview above or download the MP3.
The full PDF of the FAJ’s 70th anniversary issue is also freely available on the CFA Institute Publications website.
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Image credit: ©iStockphoto.com/Meriel Jane Waissman
The most important retirement advice I ever heard is to change your spending habits to increase the portion of your inccome directed to retirement
If you are a two car family think about switching to one car
Reduce your monthly expenses on everything from phone service to cable tv
Cut back on everything from clothing to eating out to entertainment
Enjoy your vacations at home
Save your tax refund instead of spending it.
All of this will add up to more savings
With the uncertainty in the stock market and low interest rates its the dollars you set aside that make the biggest impact
And people seem to forget they can move from high tax more expensive parts of the country to low tax (or no tax) less expensive places like moving from New York City and the surrounding suburbs to Florida or South Carolina or even upstate New York
In terms of saving, start with the comfortable percentage for your 401(k), and add a third or more of your raise each year until you’re in the 15 to 20% range. Invest in no-load, low-cost, index US/International stock/bond index funds to minimize your costs with a mix that reflects your risk aversion. The amount saved and costs are the two biggest variables that one can control.
Why Do We Still Have a Retirement Crisis?
Um… because hardly anyone has a pension anymore, that’s why.
Because most Americans don’t make enough to live and save for retirement.
Because even if you do save, you’ll never save enough to have the 2 million dollars you’ll need for a secure retirement of 20 years or so, with medical insurance.
This isn’t rocket science; greedy employers screwed their employees out of a pension back in the 1980s, and the American people were sold a bill of goods called a 401k. It’s a lie; 401Ks don’t work unless you’re rich, really rich.
For decades, fiscal and monetary policy has preferred spending over investment. Central banks hold interest rates below their free market equilibrium, enabling governments to engage in permanent deficit spending and encouraging poor investment decisions. Collectively, the developed world is eating its seed corn and impoverishing itself, so it’s inevitable that the vast majority of people are failing to accumulate wealth. And don’t blame 401K plans, the economic landscape is littered with professionally managed funds so underfunded that bankruptcy is almost certain.
The solution: eliminate corporate income taxes, put shareholders in control of corporations, give everyone an unlimited tax-free savings account, prosecute fraud aggressively, and return to the gold standard.