Several months ago I read and article in the Wall Street Journal. It stayed with me; for some reason I kept rolling it over in my mind. Eventually, I decided that I would write about it. I think there are some valuable lessons to learn.
Here’s the article. It’s behind a pay wall, so you might not be able to read it in full:
“A Generation of Americans Is Entering Old Age the Least Prepared in Decades”, by Heather Gillers, Anne Tergesen and Leslie Scism; June 22, 2018
The subtitle is even more explanatory: “Low incomes, paltry savings, high debt burdens, failed insurance—the U.S. is upending decades of progress in securing life’s final chapter”
It is a heartbreaking exploration of the lack of preparedness of many older workers as they enter retirement. Most of the people reading this probably would never end up in this situation. But I wanted to highlight some of the key points from the article and my thoughts on it.
We are lousy at using our 401k plans
The article highlights both the low balance in the average pre-retiree’s account ($135,000) and the frequency with which it is raided. WSJ details several cases where pre-retiree’s repeatedly raided their 401(k). This really struck home for me. Traditional pensions have almost no means with which to withdraw funds. And to do so invariably runs through a bureaucratic gauntlet that would deter most would-be retirement fund drainers. On the other hand, the 401(k) frequently provides loans and relatively easy access to withdraws – particularly when you leave an employer. The 10% penalty is not enough of a deterrent to prevent withdraws in extreme situations.
I’ve been involved with people discussing 401(k) withdraws. It is painful. In the event that you don’t have any other resources, what other choice is there? I usually encourage people to imagine that they’ve already depleted their 401(k), what would you do then? Whatever you come up with, do that instead of withdrawing from your 401(k).
In today’s world, the 401(k) (or equivalent) is likely to be the backbone of your retirement plan. You have to defend using it for anything besides retirement. It has wonderful advantages. One of the big ones that we’ve talked about before is mental accounting which helps us earmark the 401(k) for long-term goals. But it only works if you keep the focus on it and resist the temptation to raid the piggy bank.
Debt, debt and more debt
Retiree’s and pre-retiree’s have higher debt levels that ever before; and a greater variety including: home, auto and school debt from their children. It is common advice from financial planners: your kids can get loans for their college education, but no one is going to loan you money for your retirement.
I would go so far as to be a bit more direct with people in the 50-65 age range. I propose that you don’t do anything that decreases your financial flexibility as you head toward retirement. That means no second home payments; no 30-year refinancing on your primary residence and no additional student loans. This is a phase in your life where you should be preparing for the reality of life after retirement. You need to focus on simplifying your financial affairs rather than complicating them. Will it always be possible to simplify? No, of course not. Life finds a way of getting complicated. But it certainly won’t be possible if you don’t at least try to focus on simplifying.
You have to know where you are going
It is tough to prepare for retirement on your own. Unfortunately, we don’t have much choice these days. One of the things that really leaped out at me in the article is the lack of awareness on the level of assets necessary to fund a normal retirement. Having $200,000 in a retirement account may seem to be a huge amount of money – literally more than you’ve ever had in your life. But that level of funds would only generate around $1,000 per month for a retiree if converted to an income annuity at today’s rates. This is hardly enough to generate a happy long-term retirement.
Often people are amazed at the amounts they are required to save in order to sustain a retirement. That is why it is so important to start early, and resist raiding the retirement kitty as you go. I have also seen excellent examples of people who have started late to savings and made enormous progress in a relatively short amount of time, once they knew what they were shooting for.
Most people reading this are going to have their retirement well in hand. We are undoubtedly the luck ones. There are still lessons we can and should head from today’s retiree’s – let’s make sure we pay attention to them.
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