While many people don’t take the time to actively consider their retirement plans amid the constant press of their daily activities and schedule, it’s been suggested that such consideration today is not just important, but immanent! It’s no surprise that the pressures of the economic times in recent history have been felt by more and more of us in our daily lives. One only need drive through a local strip mall or office complex and see the persistent for rent signs on many windows in areas where nearly a decade ago it was difficult to cash in on location-location-location.
Alex Wynaendts, CEO of Aegon [1], has issued comments in a blog today accompanying Aegon’s Retirement Readiness Survey which has been published each year for the past seven years. Of the points made, I found several to be confirming rather than illuminating of my own experience in interviews with prospects and clients.
Among Wynaendts’ thoughts were the “social contract” between workers worldwide and those that support and ultimately fund their retirement plans in large part was breaking down. He mentioned that traditional expectations were, “crumbling, and responsibility is shifting fast from government and employers to individuals.” The individual will need to assume a larger interest and activity in growth of their retirement savings, and quickly!
Wynaendts expresses a concern that “a new social contract is urgent” citing increased longevity and the likelihood that populations increasingly reaching their late 80’s and 90’s encounter serious or chronic illness. I would say that all “three pillars” of retirement funding as Wynaendts refers to them, have been developing various levels of cracks in their structure for quite some time. Each of government sponsored social security, employer sponsored pensions, and personal savings of individuals have each taken the path “more often traveled”. I would say that path should be far “less traveled” and for well documented reasons.
Individual savings levels need to increase, though people find themselves squeezed in recent years by inflation, thinning wages, less job opportunities, and sadly deficient interest rates on easily accessible and safe saving alternatives in the banking industry. Thankfully, recent roll back of government regulation and tax rates have encouraged businesses to take a long-overdue step forward in expansion and returning assets to the domestic US market. As a result, employment opportunities have improved slightly.
Among the tell-tale warning signs that I have seen are the undermining of purchasing power termed “inflation”, employer retirement strategy changes, and system wide instability stemming from various corporate and governmental policy decisions. Money buys less than what it used to and it seems the average citizen barely notices anymore.
Consumers trust in market projection or expectation has fallen significantly as a result of 2001-3 and 2008 bursting dot-com and housing bubbles respectively. The banking industry and bond issuers have also rolled back bond rates to levels that ultimately force people into chasing yield in the markets, the last bastion where they believe yield can be delivered. What rates does your bank offer on savings accounts or even certificates of deposits? Real inflation rates are multiples in percentage points of current rates [2] at 6% and have risen in recent years on several occasions to 7, 8, and 9%. If your savings and growth vehicles are not keeping up with the inflation rates working against you, then your savings is losing purchasing power on an annual basis.
While some will argue that the government will always send you a social security check, the question remains, “what will those dollars buy that day?”
Performance of market connected vehicles must average out the downturns along with the recent gains and are still subject to crashes in the future. Stocks and mutual funds that live in the market, the playground of yesterday’s too-big-to-fail, are subject to swings of volatility and forces that seem of late to be able to move the markets at will. While those forces may seem unconnected on the surface, they are in fact hard-wired to one another.
Employers have shifted from defined benefit to defined contribution retirement programs in response to the employer’s ability to fund them and the risk that the employer assumes with each type of program. Not only are the outcomes of these programs no longer guaranteed (defined benefit), they are set up differently by each company, the plan custodian, and government imposed limits can change with current policy. The employers matching funds may be held for several years before they are “vested” to you and may only be accessed upon termination of employment, or other equally depressing circumstances like disability or death of the employee.
The employer sponsored programs of 401(k), 403(b) (non-profit version), and personal IRA’s are tax-advantaged accounts governed by the tax code under which they operate. Government regulation determines your rights to control your retirement wealth in relation to:
- Total contributions eligible for tax deferral, including a “phase out” of tax deferral
- Accessibility (liquidity) to your wealth until age 59-1/2 (with few exceptions)
- Taxes and penalties for early access, and failure to enact RMD’s at 70-1/2
- Types of investments that are eligible
- Eventual taxation of withdrawals in retirement with less write-offs to protect you
These programs whose growth is tied to market performance, the whims of the fund managers that steer the mutual funds, and governmental restrictions and regulations that govern them are offered in exchange for tax deferred status and termed “qualified funds”. These realities of life in the twenty-first century pose real concerns for workers, small business owners, and entrepreneurs that are increasingly expected to shoulder more of the financial burden of caring for themselves and their mates into what is looking like an ever-increasingly lengthy retirement.
I believe I have valid and valuable additional and alternative options that many people simply have not considered because the average person doesn’t know about them. They are in the tax code for those that know they are there. My business activity is to educate people on what those options are, how to best take advantage of them, and help them get qualified to participate in them.
The point at which I decided to comment on this story and interject my own impressions was the next to last paragraph wherein the Aegon CEO encapsulates everything I set out to do when I introduced the MoneySmart book and my financial services business:
“Saying that people need to take more responsibility for their own financial future may be an economic reality, but simply telling them this is not enough. Many people lack the financial literacy required to make sound decisions about their retirement savings and investments. Much can be done to improve this, for instance ensuring that financial literacy is part of the educational curriculum so that young people learn the basics of budgeting, investing and managing their savings – skills that will serve them for the rest of their lives.” – Alex Wynaendts
I routinely sit with individuals and families and review the realities in light of the economic situation here in the twenty-first century. The fact that things have changed is felt by nearly everyone. Understanding how things have changed and what can be done about it is far less widely understood. I wouldn’t assume to have all the answers, but I believe many of the families and individuals that I have helped would agree that they now have both options and safety in their wealth accumulation and retirement planning that they trust and appreciate. I’m proud to play a role in helping to put those options in place.
Why don’t most people know? People are busy. They spend many hours working. They rush home to run a household, to support student activities, to be involved in community groups, and enjoy recreation or social events when they can. The average person doesn’t make the time to review their financial future or risk exposure until their circumstances require it, or in relation to my business, are invited to do so with some free education and guidance.
There really is a difference between what is presented to the masses and what is actually available that many people don’t ever come into contact with. Of course when I say that, many people think I’m a conspiracy theorist rather than being ahead of the curve. With the economic and “social contract” walls starting to close in, I’m feeling more vindicated now than I ever have before.
Here is a bonus from Nomi Prins, author and ex-Wall-Street-insider that covers many of the more gray areas mentioned above:
https://www.aegon.com/en/Home/Investors/News-releases/2018/social-contract-for-retirement/
[1] https://www.aegon.com/en/Home/
[2] http://www.shadowstats.com/
