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Retirement/Pay

Let's see, should I swing right to left tomorrow?

This is a summary of an article from Employee Benefits News online at:

http://ebn.benefitnews.com/section/staying-current.html?sectionName=staying-current&topicName=staying-current

The story is not new, but revealing and if you plan to retire someday, heads up.  You probably won’t have enough money to maintain your current style of living for twenty plus years and if you think you will work in retirement (somewhat of an oxymoron, no?) better hope that you are among those who are able to do so because poor health (by the way what is your BMI?) changes those plans for many people.  As you see below, the average household is on track to replace 58% of their income in retirement, big deal.  Can you live on 58% of what you are living on today?  Think you are going to work in retirement, think again…maybe.

Live for today, you only live once, the future will take care of itself, how about God helps those who help themselves. 

So if you are getting close to eating dinner at 5:00 PM each day, hiking your pants to three inches below your armpit, asking for senior discounts or shopping online for a metal detector, it’s time to rethink your financial planning as well.  Fifty-eight percent of your current income is not enough, neither is 70% and probably not 80%. 

According to Fidelity Research Institutes latest retirement index - which surveyed 2,000 households and 793 retirees about their retirement finances - the average American household is on track to replace 58% of pre-retirement income, a slight jump from 57% in 2006. Oddly enough, the increase stems not from Americans saving more, but from stock market returns.

"It's more driven by the fact that we had a very strong market environment in the 12 months between the reporting periods," says Guy Patton, executive director of the Fidelity Research Institute. "A little bit of additional savings helped, but the principle driver was the market."

Factoring in health

Employers also must continue to urge workers to stay healthy because many will have to work into their retirement years to supplement their income, experts say. However, disability or illness may cut working years short. Some 55% of workers retired earlier than they had expected, typically one to five years earlier than planned, Fidelity finds.

"Of those who retired earlier than expected, 40% had their working years cut short by an illness or disability, resulting in 22% of all retires retiring early primarily for health reasons," the report reveals.

Patton says, "These findings suggest that you can't count on working into retirement because health becomes a variable that is really hard to control for a significant number of Americans."

Learning from regrets

One in five workers say they learn about retirement savings through educational materials offered by their employers, but retirees report more basic financial instruction may have been valuable.

Fifty percent of retirees indicate they would have made major lifestyle changes - such as getting a part-time job, downsizing their home, moving to a different part of the country or reducing health care expenses - to better prepare for retirement, Fidelity researchers note. Retirees say their top regrets include not opening an IRA early enough (37%), and accumulating too much debt (29%).

Crunching numbers

Fidelity also reports working adults earn a median of $22,500 in household retirement savings and expect to receive $29,500 per year in Social Security payments. In addition, 51% of households anticipate receiving a pension with median benefits totaling $18,000 annually.

Baby boomers show the highest level of retirement readiness, with an income replacement level of 62%, up two percentage points from 2006, and a median of $45,000 in total household retirement savings. - L.C.B.

Saving for Retirement

According to a New York Times article, (January 27, 2007) “Save Less and Still Retire with Enough”, a group of economists is challenging the widely held theory that people are not saving enough today for their future retirement.  According to the work of Laurence J. Kotlikoff of Boston University and a few others, current planning models are too conservative and cause people to save too much for the future at the expense of living for today.  Really, now there is a message we all want to hear.  I bet those folks I just saw lined up at Universal Studies plopping down $288 for a family of four are in heaven, let’s go back tomorrow!  As you read the article closely you find out that the studies are based on the spending habits of people born between 1931 and 1941.  I see, the generation that grew up in the depression or whose parents did have the same spending and saving habits as baby boomers and generations x and y.  Let me check the news on my 50” plasma TV.  

I wonder if the fact that this generation was pretty much the last to enjoy widespread defined benefit pensions as part of its income has anything to do with their prosperity.  The last time I looked you can’t outlive one of those. Last night I took a group of retired employees to dinner, most were in their late seventies and one was celebrating his 87^th birthday, all had been retired ten or more years. The discussion was mostly talk about health care costs, clipping coupons to save money, and eating at 5:00 PM for the specials (which we were doing). The group was holding a meeting at a certain hotel and while there were 135 in attendance only 12 were staying at that hotel, the rest were at other nearby (cheaper) hotels that offered a free breakfast.  The reasons for their frugality are likely they are reflecting their upbringing or they simply need to save money or a combination of both.  In either case, they are not representative of the working population today.

These economists have not studied the baby boom generation but believe they too are secure in their future retirement.   Professor Kotlikoff was born in 1951 so his frame of reference may well reflect the baby boomer outlook on life. And to make matters worse these optimistic calculations take into account life insurance and real estate so if your property tax bill is unaffordable on your fixed income, merely sell your home or with greater finality, simply die and you will absolutely not outlive your savings.

Interestingly the Wall Street Journal, June 26, 2006; Page R2 contained the following article:  Living Expenses in Retirement Are Higher Than Many Estimate

“Many Americans have trouble estimating how much money they'll need in retirement, a Wall Street Journal Online/Harris Interactive survey indicates.”

“The online survey of 2,075 U.S. adults found that 37% of respondents who are retired said their living expenses are higher than they anticipated before retirement, while 45% said expenses are about the same as they expected and 18% said expenses are lower.”

Do economists live in the real world?  I am beginning to wonder.  Perhaps I should send a few of the letters from retirees that I have received over my 45 years in corporate benefits, you know, the ones pleading for an increase in their pension, the old living on a fixed income bit.  But these are the lucky ones and my successor’s job will be much easier, no letters to answer on this note…no pension for our future retirees either.  Like many Americans, it’s a 401(k) baby, save, invest wisely and spend prudently, but hey, according to the non-traditional thinking on this…that’s no problem.  In fact it is, workers don’t save sufficiently if they are without a pension, and they certainly don’t know a thing about investing, diversification or re-balancing their accounts.  When they do retire even with a big account balance many fail to comprehend that buying that dream boat out of the $1 million you have in your 401(k) puts the retirement income for life plan in jeopardy.  And wait, the overstuffed 401(k) is taxable, so subtract 20% or more from your balance. 

It would appear that many people have already begun taking the save less approach. According to Hewitt Associates, 45% of workers leaving the job took a cash payment from their 401(K) (and paid the taxes and penalties to boot). If you consider the departing workers under 30, the number goes to 66%. If they do that each time they change jobs, living for today will not be a problem.  Of course, we need to also mention the 20% or more of workers who do not even participate in a 401(k) when it is available. I guess they are counting on a fat Social Security check in 2035. 

Here is my favorite quote from the NYT article, “There is risk in saving too much,” Mr. Kotlikoff said. “You could end up squandering your youth rather than your money.”  Squandering your youth? Squandering your youth? I am so glad, the plastic society is vindicated.

On the other hand, some experts feel that if you are worried about major medical expenses or you don’t mind leaving money for heirs, over saving is fine.  This is what I call the global warming approach, you may not be convinced the danger is real, but hedging your bet in the event it is, is not a bad idea.

Keep saving!

Pension, What Pension?

The world of retirement and pensions is changing fast, more and more employers are abandoning the traditional pension plan in favor of what we call a defined contribution plan, that is you put in your money, perhaps the company matches a portion of it and while the contribution is defined up front the end amount is not.  Prudent saving and investing is required for ones working life and then the trick is to use the money so that you don’t outlive it.  Someone sent me the following letter presumably sent to Sen. Clinton.  I can’t verify what the letter says, but I have included the facts on the NCR pension freeze. 

The future of American retirees is changing and if your employer is tinkering with your pension promise, you should pay attention.  Of course, what the writer of this letter fails to note is the additional accrual within the 401(k) plan that will offset some of lost future pension accrual. 

The real question is what the current trend will cause in terms of Congressional reaction.  The reality is not much, there is no requirement for an employer to provide a pension of any kind and most Americans have none.  If you do, you are among the lucky ones.

Dear Senator Clinton,

As you may know, NCR Corporation recently announced that benefit accrual for their defined pension plan will cease 12/31/2006. Pension calculations for employees will be frozen using that date. What this means to vested employees in real dollars varies depending on their age. For my family, the benefit reduction will result in a shortfall of $250-$500K over an estimated lifetime (age 85). That is a reduction of over 50% in my pension income.

Pension income from NCR’s plan was modest without this change. Best case is about 30% of one’s pre-retirement income with 40 years of service. Freezing the pension plan is putting 10’s of thousands of NCR employees at financial risk at a time when they have no means to recover.

I suspect that you, as a leading presidential candidate for the Democratic Party, are also concerned over these developments. This very issue may in fact be raised in the campaign in that the CEO of NCR, Bill Nuti, has hosted fundraisers for you at his home in the Hamptons. Speculation may arise as to how a Democratic leader can maintain such a close relationship and receive support from business leaders who withdraw earned benefits for so many working citizens.

Law currently allows for such actions and only law will protect working Americans. Please consider a solution. Those who have dedicated their entire working lives deserve the benefits they have earned.

Sincerely,
Now Working Poor

The Dayton Business Journal reports that NCR: “employees have the option to participate in a 401(k) with NCR matching up to 3.75 percent of salaries -- along with the pension.

With the new plan, NCR will increase its matching contribution to 5 percent of the employees' contributions. Also, benefits employees earned under the pension still will be available at retirement.

Employees older than 40 will have the option to stay on the present plan -- receiving the 401(k) with a 3.75 percent match and the pensions -- or get the 401(k) with the 5 percent match and no pensions.   NCR will be offering training classes and Web applications to help its employees decide how they want to invest, Dafler said. He said employees can choose from about 300 mutual funds that include Fidelity, Templeton and Scudder with investment styles ranging from international stocks to conservative bonds.”

You Aint' "Entitled" to Nuttin!

In November 2002 I wrote an article for Employee Benefit News entitled “Incentives May Not Be What They Seem To Be” The article said in part, “Conventional wisdom holds that if you want superior results, you must provide financial incentives to move people toward the desired goals. Do incentives always lead to the best results?”  Nearly four years later the trend toward bonuses in lieu of base pay changes has accelerated.

If you listen to the company line, employers want to wean employees away from entitlement by giving less and less in annual raises and more in incentives.  The truth is that a good, competent worker deserves a raise, but a poor performer does not.  So there is no reason to give each and every worker an annual raise, but there is a need to raise the base pay of all those who do their job with more to those who do the best job.  People are not paid to work on a project or a single goal, more often they are paid to come to work every day and perform a (hopefully necessary) task. Of course, moving away from the annual base pay decision also takes the painful task of evaluating employees and then making pay decisions away from managers, which may be a good thing since the manager is probably more focused on his or her goals to get that bonus.

Beyond base pay all workers should share in the results of the organization, not by setting scores of goals and measures, but by simple corporate level measures that do not allow for the manipulation of results or create goals that benefit only those directly involved in that goal. In other words, some form of after the fact profit sharing.

My view is that we tend to focus incentives too narrowly, and that leads to less than optimum results or such strong incentives as to corrupt the goal (and sometimes the individual). Let’s see, what was the last company to report it may have a problem with back dating stock options?

If a manager is provided with a bonus based on meeting a budget she will meet that goal, even if it means missing a golden opportunity for better long-term results. And why not, why shouldn’t a person act in his own interest especially while employers are also saying they are designing new retirement vehicles because people don’t stay long at one company and thus the long term commitment is no longer valid.

If a company is run well, as its sales increase so should its profit. So a share of the profit can reflect the efforts off all workers who may be managing a budget, marketing, creating new products, negotiating vendor contracts, managing organizational structure, etc. Hey, wait a minute aren’t all of these things part of someone’s job?

I am wise enough to know that “profit” can be manipulated through accounting strategies (or such lofty steps a freezing pension plan accruals). I am not qualified to suggest ways to measure pure profit that excludes those possibilities, but I am sure someone can accomplish that.

Who doesn’t like a bonus, I count on one each year, but I resist setting my standard of living on it; others are less disciplined. From the workers point of view there are inherent disadvantages to relying on an annual bonus.

1.      There is the obvious spending the promise before it is realized and setting ones standard of living on that expectation. This is similar to workers who come to depend on regular overtime each week, they will resist all efforts to eliminate or reduce it and why not, the incentive is to continue to be inefficient.

2.      In many cases the bonus is excluded or only partially included in earnings for pension purposes or 401(k) contributions and employer match.

3.      A bonus will not typically be used in determining disability benefits or life insurance benefits offered by a company. A worker with 60% base pay replacement for long-term disability will have a problem if his or her living expenses are more aligned with base pay plus an annual bonus.

4.      Income tax withholding may be at the standard rate for a lump sum payment and total income at year-end may require a different rate. Workers may find they underpaid income taxes.

5.      Most plans allow a great deal of discretion on the part of the plan sponsor so an assumed payout based purely on goals and numbers may not be realized. “But the plan says I’m entitled to the bonus, we met our goals!”

From the employer perspective the greatest risk is what I will call lost opportunity, plus lost imagination when focus on stated goals inhibits the ability for managers to deviate from that goal when a different course may provide greater benefits to the organization. And there is the risk associated with employees who have come to depend on the annual bonus doing things that should not be done to make sure the bonus happens.  Employers worried about an entitlement mentality should not expect that to change because of a bonus program.  Most workers under a broad based program have little or no line of site to the goals and perhaps very little ability to influence the outcomes. In reality they do their job and wait for the annual bonus they are “entitled to” under their incentive plan. Some experts feel that bonuses are very effective in creating focus. Indeed they are, if you want to create focus on getting that promised bonus, but not if you want to get the best overall results for the organization.  Look at it this way, if you hold a carrot out to a mule it will no doubt walk toward that goal regardless of where he is going and that may include going right off a cliff. 

Rent National Lampoon’s Christmas Vacation if you don’t believe me.

Bottom line, pay for performance and results, base pay that is. Then either share the company results through a broad based profit sharing (real profit) plan or single out those who achieve superior results (no goals) with additional spot cash awards. The word will get out that results do matter.

Oh where or where did my pension go, oh where oh where can it be?

And what does that all mean?  Well it may mean eating out less often, a plain cup of coffee rather than a mocafrapchinolate, one less trip to mouse world, a shorter vacation, a house with only the number of bedrooms you really need…get the point?  Probably not, but you will…. hopefully in time.

A Warm and Fuzzy Feeling…or perhaps not.

Like millions of other Americans born in November, I recently received my annual Social Security Statement telling me my estimated monthly benefits, my lifetime contributions and more.  For one thing I can now figure out that if I begin to collect my full benefit at age 66 (in too few years hence), in 3.97 years I will receive in benefits an amount equal to 45 years worth of contributions not counting annual inflation increases in the Social Security benefit which will make the period less. Even counting my employers matching contribution that is a total of less than eight years collecting benefits before all the funding by me and by my employer (yes, that’s singular as I have worked for the same company for 45 + years) is exhausted.

And you thought the Federal government wasn’t good with math, it looks pretty good to me.  On the other hand it doesn’t look too good for my children and my grandchildren. This years Statement has a message, it says:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits.” 

Would that Congress would make changes, or even tell the American people the truth about Social Security and Medicare. 

Not many people will pay attention to their Statement or if they do, they may well dismiss the message about future benefits.  That’s a shame, this is serious stuff.  The US has a negative savings rate, people are generally unprepared for retirement and yet, we seem to go on blissfully worrying more about a five bedroom, four bath house with granite counter tops than we do about our future.

In a recent article in Money magazine there is a story of couple who were married later in life and had two children.  Subsequently, they were watching television and saw a story about children in China in an orphanage.  The pull on their heart strings was too much and they adopted two children.  The result is that when the husband begins to collect Social Security the children too will be eligible for a benefit until they are eighteen.  These folks made a personal decision to help these two children which is certainly admirable, but they did so knowing that they were jeopardizing their future financial security, their retirement plans, etc.  But one has to wonder if such a situation was the intended purpose of Social Security.  Is society as a whole responsible for such individual actions?  In this example, Social Security is little more than a form of welfare we cannot afford. 

My Social Security Statement shows that if I became disabled right now, I would receive $490 more per month than if I retired.  I am 63, so why should I receive that much more than my accrued early retirement benefit? In fact, the disability benefit is only $50 per month less than my full benefit at age 66.  If the system could afford such generosity that would be one thing, but when we tell people they may receive only 74% of scheduled benefits, it’s quite a different situation.  And let’s look at inflation, the basis for annual adjustments to Social Security benefits is widely criticized because many of its components do not generally affect older beneficiaries as they do younger workers.  Some experts say that merely tweaking the factors used in the adjustment would solve a large portion of the funding problem, but even mentioning that alternative riles the AARP and others. 

Thus we have made promises that cannot be fulfilled, needed changes that cannot be made and American’s seemingly oblivious to the situation.  What’s in your wallet?