Why post-retirement planning is harder than ever

Kelley Holland | @KKelleyHolland

Thursday, 26 Mar 2015 | 7:30 AM ET

CNBC.com

You have heard the exhortations to save, save, save. Perhaps you have even managed to sock away a decent retirement nest egg. If so, good for you.

But do you have a plan for how to draw down that money?
For millions of Americans, the answer is no. While 401(k) plans usually offer a defined array of investment choices, online tools and other guidance, there is no such system in place for when workers retire.

Those with financial advisors may have the benefit of expert advice, but even with that, there are no longer any set rules of thumb for how to draw down savings—many advisors caution that the so-called 4 percent rule won't suffice—and at what pace. For people who can't afford expert advice, all bets are off.

"It's obvious [a lot of] people are not getting advice if they are doing what they are doing" with their retirement savings, said Robbie Hiltonsmith, a senior policy analyst at Demos.

One challenge in seeking out guidance is that the rules governing investment advice after retirement are different from those related to 401(k) plans. There are strict regulations requiring advisors to act in 401(k) savers' best interest, but when it comes to advice relating to IRAs, including rollover IRAs, those rules may not apply. Brokers, for example, only have to recommend investments that are "suitable" for a client, even if they may come with higher fees.

The change in rules on investment advice is not actively publicized, and it occurs at a time in savers' lives when they may be contending with physical infirmity, declining cognitive abilities and more. In addition, it affects an enormous number of retirees: even though IRAs were never intended to be anyone's primary retirement account, assets in IRA accounts now top those in 401(k)s, mostly thanks to all of the rollovers.

"If you roll your money over from a 401(k) to an IRA, it's really the wild west," said Anthony Webb, a research economist at the Center for Retirement Research at Boston College.

How costly is that possibly conflicted advice? The Council of Economic Advisors has examined the impact on savers of recommendations to buy funds that are suitable but come with high fees, and it found that the cost can reach $17 billion every year. 

Another challenge for retirees or people close to retirement is the near absence of guidance on complicated financial questions like how long their money needs to last—something actuaries study long and hard to learn how to do. This was not a big issue when defined benefit pension plans supported more people, but they no longer do. 
 


"People shouldn't be expected to estimate how long they will live," said Hiltonsmith. He said most people are withdrawing their money too quickly, leaving little or nothing for their final years, partly because they underestimate how long they are likely to live and partly because they do not have enough savings. 
 
In the past, financial professionals used to talk about a 4 percent drawdown as a good rule of thumb for retirement. But that approach is no longer so apt, said David John, senior strategic policy advisor at the AARP Public Policy Institute. It's not safe anymore to assume that your investments will earn what that 4 percent rule was based on. Given current rates of return, the 4 percent rule "gives you a 15 to 30 percent chance that you will run out of money," he said.
 
But determining how much to draw down isn't easy. Unlike savings calculators, which many financial firms offer online to help investors determine what they need to put away, tools for calculating retirement spending are rare. "When it comes down to retirement income, you can find annuity calculators, but you really can't find anything that's more complex," said John.
 

Yet another challenge for retirees is the prospect that they may have to make complicated financial decisions on their own later in life, when their cognition is declining. Studies have shown that even a moderate decline in cognition can have an outsized effect on financial decision-making ability.
"You don't want to reach a time where you have been retired for 20 years and now find you have some incredibly difficult decisions to make," said John. "This is something that is best handled to the extent that you can as close to retirement as possible."

There are some changes underway. The White House has proposed requiring all investment advisors to abide by a "fiduciary" standard, acting in the best interest of clients and not just offering choices that are suitable. (In a white paper released this week, the financial industry argues that brokers are already "thoroughly" regulated and that existing investor protections "prohibit recommendations of investments at unfair or unreasonable prices.")

There are also new rules aimed at encouraging the use of deferred annuities in retirement, so that investors can make sure they have some income in their last years.


Still, the problem of how to draw down savings remains—and becomes most immediate at a vulnerable time in investors' lives.

"The group getting the most protection are the middle-aged workers. We've got this exactly wrong," said David Laibson, a professor of economics at Harvard who has studied decision-making over the life cycle. "It should be that the most vulnerable population is getting a helping hand."

Kelley Holland

What Happened to the Middle-Class American Family?

Seth Freed Wessler

Wednesday, 18 Mar 2015 | 8:48 AM ET 

NBC News

First comes love, then comes marriage, then comes baby in the baby carriage … or so the old taunt goes. Increasingly in America, though, the middle step is missing, and not totally for reasons of changing morals.

It's the economy.

More than 40 percent of American children are now born to unmarried parents, down from just five percent in 1960, according to Pew Research Center. Fifty years ago, the vast majority of adults — 72 percent — were married. The same is true for only about half of adults today. The declines in marriage are especially pronounced in families with lower earnings. Tying the knot is increasingly a marker of class status in America.

John Brecher | NBC News

 

Michael Bridges and Laura McCann with their daughter.

 

When Michael Bridges and Laura McCann learned that McCann was pregnant four years ago, their parents expected that the young couple would get married.
"It was my first concern," said Michael Bridges Sr. "I felt the marriage is a moral thing, so they don't go falling apart. I feel like it's more stable."

"We both grew up in traditional families," said McCann, 28, a social worker in Boone, North Carolina. "My father was a truck driver, the breadwinner, and my mother stayed home and raised us. Lots of people thought we'd be the same way."
But that is not the route followed by the young couple, who met in high school and whose baby was born months after McCann graduated from Appalachian State University with a social work degree.

"We didn't want to get married just because we had a kid," said Bridges, 29, who was working for a building company when Olivia was born. "I guess it's just about the times I grew up in. A lot of the people I know are like us: kids but not married."

Two years later, Bridges and McCann separated. "We weren't going to stay together just because we were together, if it wasn't the right thing," McCann said.

Changing values, norms ... and the economy

The growing ubiquity of families like the one that Bridges and McCann have crafted is tied in part to changing values and norms. But these shifts are intimately connected to the reordering of economic institutions that once underpinned middle and working-class family life, scholars say. As industrial sector and professional jobs that a half a century ago provided men with enough income to support a family disappear, so has the attachment to marriage as a prerequisite for an economically stable life.
"One of the most important determinants of marriage historically has had to do with men's earnings," said Ronald Mincy of Columbia University's School of Social Work. "It's now the case that men now have lower real earnings than their fathers, even if they have the same level of education. Men's earnings in particular are important to decision to whether people get marriage. If men are not earning high wages, there's less draw to get married."

Research has shown that there's a smaller marriage gap in U.S. cities with better labor markets for people with less education. And scholars are finding that there's a growing marriage gap between high and low income Americans. This, researchers say, is particularly acute when men earn less.
And among men between 20 and 49, over half — 56 percent — of those with higher paying professional and managerial jobs were married in 2013, according to analysis of Census data by Andrew Cherlin, a Johns Hopkins University sociologist. Less than a third — 31 percent — of lower-paid men working in the service sector were married.


These economic shifts, scholars say, have been part of the reason that cultural ideas and commitments to married families are changing.
"The economy has not been supportive of marriage," said Isabel Sawhill, co-director of the Center on Children and Families and the author of the book "Generation Unbound." "As marriage has disappeared and other lifestyles — single and unmarried parenthood — have become more prevalent, these family structures have gained a staying power that's not easily reversed simply by changing the economic environment."

Bridges grew up in a family that was distinctly of the last generation. His mother and father, neither of whom graduated from college, both worked for decades at Bell Telephone in Texas, making solid incomes that bought a house in the suburbs, and later a home in the mountains outside of the rural North Carolina town of Sparta where Bridges went to high school.
"We didn't need for anything," said Bridges, who lives in the house on the mountain that his parents bought when they moved from Texas to North Carolina about 15 years ago. "I can't say we were wealthy, but it was a pretty regular family."



Michael Bridges Sr., 57, acknowledges that things have changed for his son's generation. "In the past, when I was his age, you could get on with a company and you could be there till you're old and gray. But with downsizing and companies being bought up, it's harder."
"Still," the elder Bridges said, "the institution of marriage is important."

Children with committed parents

Children with two committed parents, research shows, tend to do better than those with single parents. But what's not clear from much of the research is whether that's because having two parents at home is better for children, or if those who do not get married are generally more likely to be poor, and otherwise lack access to better opportunities for the youngest generation.

What is clear is that little about the American economy is like it was a generation or two ago. As middle-income jobs are disappearing, the biggest wage losses have been in manufacturing and construction sectors that are traditionally held by men. While the hollowing of the middle class has hit men and women alike — much of recent job growth has been concentrated in the low-wage service and retail sectors — there's been a slower but still significant expansion of high skilled, middle-income service jobs like social work or nursing. Women, who for the first time in history are more likely to have college degrees, are better positioned to take advantage of these jobs.
McCann's path has followed the tracks of the emerging economy. She says that when she was pregnant and gave birth to Olivia, the pressure was thick to choose a traditional route.

"For the older generation, it was marriage first, baby second. When we moved to Sparta the stigma there," McCann said. "I was pregnant and waiting tables and I had people saying 'why don't you have a ring on your finger and why are you not married?'"
Working as a waitress, McCann says she might have been able to make it on her own. Bridges was working at the building company and keeping them afloat.
But McCann finished college, and soon found a job as a social worker, moving up the ladder to become the director of social services at a skilled nursing facility in Boone, North Carolina.

"There's a lot of powerful woman now who have been able to mobilize in a way that when my mother was my age she could not," McCann said. "She could probably not have made it on her own. The economy plays a huge part in that."
Bridges, for his part, hasn't finished college. He's re-enrolled in community college now, studying marketing. "I want to do something that I enjoy," he said. "Now that Laura has her own income and a job, we don't worry about money so much. Nothing has really changed except for the living situation."

"Looking at it now, I truthfully done everything backwards," he said. "If I were my parents' age, I'd have married, then had kids, and had the same job for my whole career. But that kind of work just isn't around."

These 20-somethings invest like 'Depression babies'

Sarah O'Brien, special to CNBC.com

Tuesday, 10 Mar 2015 | 9:00 AM ET

CNBC.com

Even though the stock market is booming and the economy continues to grow, the 2008 financial crisis is having a lingering effect on many young adults' willingness to take risks.
The problem, say financial advisors, is that it's causing an entire generation to potentially miss out on huge gains in their retirement portfolios.


"A lot of them took risks. They stretched to go to grad school with loans, found themselves without a job or took on debt to buy homes with nonconventional mortgages, with the promise that their homes would appreciate, but they didn't," said Barry Glassman, a certified financial planner and president of Glassman Wealth Services. "The message they got is that risk doesn't always work."


A Bankrate.com report released in July showed that Americans age 18 to 29 are more likely to choose cash as their favorite long-term investment over any other age group. In fact, 39 percent said cash was their preferred way to invest money not needed for 10 years or longer.
The report pointed out, however, that the S&P 500 Index had gained 17 percent over the previous year, while cash investments generally were garnering returns below 1 percent.

Jonya | Getty Images

In another study, released earlier this year by Northwestern Mutual Life Insurance, only 11 percent of those age 18 to 29 said they are comfortable with the risks associated with growth strategies in their portfolios. Just 14 percent said they are pursuing as much growth as possible.
"The danger in being too conservative is, foremost, your portfolio won't even keep pace with inflation," said Ben Tobias, a certified financial planner and president of Tobias Financial Advisors. "That's a problem."

Tobias said his firm has worked with clients' adult children who are actually more conservative than their parents.
But consider this: Tobias pointed out that if you were to invest $100 in certificates of deposit—which are insured by the Federal Deposit Insurance Corp.—you might double that in 20 years.
"But the fact that it doubles is less important than how much that $200 will buy in 20 years," Tobias said. "You don't lose [your original investment], but you're guaranteed the effects of inflation and taxes, and you'll end up with less purchasing power than your original investment. That's the most important thing."


Advisors say millennials' aversion to risk is reminiscent of so-called "Depression babies": people who grew up watching their parents and other adults lose their life savings, their jobs and general financial security.

      

Young adults, likewise, have lived through the tech bubble bursting in 2001, the 9/11 terrorist attacks and the 2008 financial crisis.

"They are less trusting of big financial institutions and the stock market in general," said certified financial planner Greg Sarian, managing director and partner at HighTower Advisors. "I didn't see this [phenomenon] 15 years ago."


What Sarian and other advisors do is educate young clients—or adult children of older clients—about exactly what risk is in a portfolio, and help them figure out exactly how much risk makes sense for them personally.


"They just won't make money in bonds and cash," Sarian said. "That only protects your money.

"If you're in your 70s, protection is critical," he added. "But if you are young, you need to take some risk in your [asset] allocation."


However, most young adults are not benefiting from sitting down with a professional who can ease their mind about the stock market. According to a report from The Northwestern Mutual Life Insurance Co., only 13 percent of adults age 18 to 29 work with a financial advisor.
So for those going it alone?


"I'd encourage them to look at any 20-year period of the stock market and its performance over that time," Tobias of Tobias Financial Advisors said.

For example, take the 20-year period from 1993 to 2013, which included two of the worst periods in stock market history. Yet the average yearly return for the S&P 500—generally considered a broad gauge of the stock market's performance—during that 20 years was 9.13 percent. Even when adjusted for inflation, that figure is 6.6 percent.

Tobias points out that many of the horror stories young adults have heard of people losing their shirt in the stock market come from those who failed to stay invested when the market crashed.
"The number of people who liquidated their portfolios in 2008 is tremendous," he said, adding, "They are the ones who are hurting. The ones who stayed invested don't have those horrible stories."

"Inherently, if you feel a sense of stability, you can open your mind to taking more risk." -Avani Ramnani, director, financial planning & investment management, Francis Financial

Certified financial planner Avani Ramnani pointed out that if young adults face uncertainty in their lives due to unemployment or underemployment or any other life situation that makes them feel insecure, they are less likely to take financial risks in their portfolios.
"Inherently, if you feel a sense of stability, you can open your mind to taking more risk," said Ramnani, director of financial planning and investment management for Francis Financial.
"The danger is the long term," she said. "If they stick to that conservative approach to investing over their whole life, they are [hurting] themselves."


—By Sarah O'Brien, special to CNBC.com

Do you really need $2.5 million for a good retirement?

Tom Anderson | @bytomanderson

Tuesday, 10 Mar 2015 | 2:54 PM ET

CNBC.com

   

You can't feel secure in retirement if you don't have a good idea of how much money you'll need.
But if you believe a new Legg Mason survey, you may have to save far more than you think. Investors surveyed by the global investment management firm said they will require an average of $2.5 million in retirement to enjoy the quality of life they have today.

That's about $2.2 million more than the average balance of $385,000 those investors actually had in 401(k)s and similar retirement plans, which might help explain why only 40 percent of the 458 investors surveyed said they are "very confident" in their ability to "retire at the age I want to." (And the investors surveyed have set more aside than the average retirement saver. At Fidelity, the nation's largest retirement plan provider, the average 401(k) balance was $91,300 at the end of 2014.)
Despite their above-average savings rate, these investors are worrywarts. On average, they told Legg Mason they spend an hour and 18 minutes worrying about money each day. That's 475 hours, or nearly 20 full days, of financial hand-wringing a year.
 

All that anxiety has generated some resolve to change savings habits. Some 72 percent of investors surveyed said they would make sacrifices now to have more money in retirement and 42 percent expect to cut expenses so they don't outlive their assets.

Image Source | Getty Images

How much do you really need to retire?

Of course, most people won't need to save $2.5 million to have a comfortable retirement. But figuring out how much you should squirrel away can be challenging.
 
Fidelity estimates most investors require about eight times their ending salary to increase the chances that their savings will last during a 25-year retirement. But every retirement is different. People also tend to spend lavishly in their first years of retirement before their spending declines in later years.
Health care is the wild card in retirement planning, especially as Americans live longer. Fidelity projects a 65-year-old couple retiring will need an average of $220,000 to cover medical expenses in retirement.


A financial plan will help you estimate how much you will need to save. "Without a plan, it's like being in dense fog. You can't see the end goal and there is no clear path how to get to your goal," said Andy Tilp, a certified financial planner and president of Trillium Valley Financial Planning near Portland, Oregon.

Tilp also recommends those close to retirement factor in the potential costs of long-term care. "Not everyone will require long-term care, but it is good to know the impact of the addition expenses. We look at whether they can afford to self-fund, or whether they should consider long-term care insurance," he said.


CORRECTION: This version updated with Legg Mason correcting data from its survey about how much time investors spend worrying about their money.

Tom AndersonPersonal Finance Writer

Americans Aren’t Saving Enough for Retirement, but One Change Could Help

Eduardo Porter

Wednesday, 4 Mar 2015 | 10:22 AM ETThe New York Times

   

Here is something every non-rich American family should know: The odds are that you will run out of money in retirement.


On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve's Survey of Consumer Finances.


That's not nearly enough. And the situation will only grow worse.
The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until 65, two years longer than the average retirement age today.




Using a different, more complex model, the Employment Benefit Research Institute calculates that 83 percent of baby boomers and Generation Xers in the bottom fourth of the income distribution will eventually run short of money. Higher up on the income scale, people also face challenges: More than a quarter of those with incomes between the middle of the income distribution and the 75th percentile will probably run short.


The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.


"Everybody's big focus is that we have to save more," said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. "A greater part of the problem is the failure of investors to earn their fair share of market returns."
His observation suggests a different policy prescription: shoring up Americans' retirement requires, first of all, aligning the interests of investment advisers and their clients.
A research paper by Mr. Bogle published in Financial Analysts Journal makes the case. Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly.


First, there is the expense ratio — about 1.12 percent of assets for the average large capitalization blend fund. Then there are transaction costs and distribution costs. Active funds also pay a penalty for keeping a share of their assets in low-yielding cash. Altogether, costs add up to 2.27 percent per year, Mr. Bogle estimates.


By contrast, a passive index fund, like Vanguard's Total Stock Market Index Fund, costs merely 0.06 percent a year in all.


Of course, Mr. Bogle has a horse in the race. He founded the Vanguard Group. He invented the first index fund for the public. His case is powerful, nonetheless.


Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.


We might have seen this building decades ago. As companies gradually did away with the defined-benefit pensions that once provided working families with their main supplement to Social Security, workers found they had to shoulder the responsibility and risk of saving and investing for retirement largely on their own.


In 1979, almost two in five private sector workers had a defined-benefit pension that would pay out a check until they died. Today only 14 percent do. Almost one in three, by contrast, must make do with a retirement savings account alone to supplement their Social Security check.


If there is an industry rived with conflicts of interest, it is the financial conglomerates that advise Americans on investing these savings. Yet nobody was paying attention to the safeguards that might be needed when corporate retirement funds managed by sophisticated professionals were replaced by individual 401(k)s and Individual Retirement Accounts.


"Wall Street makes no money on low-cost index funds," said David F. Swensen, who runs the investment portfolio for Yale. "That is the problem."
It's not hard to find evidence of Wall Street's rapaciousness.

      

Sendhil Mullainathan of Harvard and colleagues from M.I.T. and the University of Hamburg sent "mystery shoppers" to visit financial advisers.They found that advisers mostly recommended investment strategies that fit their own financial interests. They reinforced their clients' misguided biases, encouraging them to chase returns and advising against low-cost options like low-fee index funds.


Another study, by Susan Christoffersen of the University of Toronto and colleagues from the University of Virginia and the University of Pennsylvania, found that investment advisers directed more of their clients' money to funds that shared the upfront fees with them. Returns of these funds were poor, compared with alternatives.


"It is superslimy," noted Kent Smetters, an expert on finance at the University of Pennsylvania's Wharton School.
President Obama has tried to take a crack at one corner of the problem: questionable advice provided by managers of I.R.A.s.


For all their flaws, 401(k) plans have a fiduciary responsibility to act in participants' best interest. Managers of I.R.A.s, by contrast, are not legally bound to put their clients' interests first. They must offer "suitable" products — a much squishier standard.
"They can't put your grandma in a heavy tech fund," Mr. Smetters said. "But they could put her in a more expensive bond fund that pays them a huge commission."


It should be no surprise which of these Wall Street prefers. In a 2011 report, the Government Accountability Office of Congress said it found advisers who were paid $6,000 to $9,000 if clients rolled over savings from 401(k) plans to I.R.A.s.


I.R.A.s are a huge source of profit for Wall Street. Workers roll some $300 billion worth of 401(k) balances into I.R.A.s when they leave their jobs every year.


The White House's Council of Economic Advisers argues that "conflicted advice" by advisers who get payments from the funds they recommendreduces the annual returns to investment by 1 percentage point, a more modest penalty than Mr. Bogle's analysis might suggest. Still, this could cost savers up to $33 billion a year out of $3.3 trillion invested by I.R.A.s subject to potentially conflicted advice.


In 2010, the Labor Department proposed imposing fiduciary responsibility on I.R.A. advisers. The resistance from Wall Street was so fierce that the Obama administration was forced to back down. Last month, the administration tried again. Perhaps it will have better luck this time.
Mr. Swensen, Mr. Bogle and Mr. Smetters applaud the Obama administration's shot at changing the rules. But they acknowledge that imposing tighter standards on I.R.A.s will not end suspect advice. And most investment assets are held outside tax-preferred retirement accounts and would not be subject to the rule change.


Unlike regulations in Canada and some Western European countries, which have essentially banned kickbacks from funds to investment advisers, the Obama administration's proposed rule does not directly attack conflicts of interest.


But the new rule could move American retirement saving one step closer to the goal: getting almost everybody to stop trying to beat the market, put their money in low-cost index funds and leave it there. Then Americans might reach retirement better prepared.