I think most everyone is aware of the very real and present danger that lies in wait for America’s baby boomer generation: they’re not financially ready for retirement. That’s an understatement…
The Employee Benefit Research Institute is the go-to authority in data mining for information about future retirees. Each year, the Institute surveys hundreds of people to determine the status of the retirement landscape, so to speak. This survey is conducted in March of each year, so I expect a new release soon, though I will continue on with data from its 2010 study.
We have no idea where to end, and thus we have no idea where we should start:
A full 29% of people think they need less than $250,000 to retire, and 13% don’t even want to take a guess. This study was conducted in the United States, so I’m just going to come to the conclusion that everyone will need more than $250,000 for any reasonably comfortable retirement. We shouldn’t be surprised at the results, even Wharton MBAs don’t understand retirement planning!
Goals vs. Progress: How Savings Stack Up
Another excellent study was released by Wells Fargo in December 2010. I’m going to highlight the juicy parts, with emphasis mostly on baby boomers, the generation closest to retirement age.
As of December 2010, the median retirement savings for those 50 to 59 was only $29,000. However, having reported their figures to the company, some 56% of future retirees in this age group said they were “confident” or “very confident” about having enough to support the retirement lifestyle they desire.
Step back for just one moment. If median savings are $29,000, and 56% of people responding said they felt confident in their retirement plan, then that means, in the best case scenario, at least 6% of respondents 50-59 years had saved less than $29,000 for retirement but felt good about it! That’s just stupid.
But it gets even better:
All told, the average middle class saver predicts a need for $300,000 in retirement savings, but has saved only $20,000 to reach that goal. This same group expects to have a retirement 19 years in length, with a 10% annual withdrawal rate.
Facepalm. Let’s fix this.
There is only one solution on which we ALL agree
The only public policy improvement supported by all five “generations” surveyed was legislation intended to increase awareness and provide for better access to 401k-related financial advice. Hell yes! This is where we begin.
We don’t need to debate social security, we don’t need to take on Medicaid; let’s see what we can do just by making opportunities available where we agree.
Bringing in two more studies:
- Charles Schwab found that after speaking to a representative, more than 70% of people who sought 401k advice increased deferral rates, nearly doubling their annual savings rate to almost 10% of total pay.
- Fidelity reports that after using an online tool designed to help investors plan for retirement, fifty percent of all users increased savings to 7% of pay from 4%.
My Modest Proposal
It appears that savers only need to think about their retirement in order to save for it–Fidelity saw a 75% increase in savings due to an online tool, for crying out loud! I think it’s time for a new tax incentive of epic proportions.
Let’s halve the 7.65% FICA tax rate that an employer has to pay for hiring employees. In exchange, the company has to allow employees, twice per year, to sit with their 401k plan sponsoring agent to discuss their retirement goals, savings goals, and financial planning goals, whatever.
So, the employee gets two days off per year to receive competent retirement advice, and the company saves 3.825% of the employee’s wages per year just for allowing them to plan for retirement. The total cost to government would be $250 billion per year based on a very reasonable revenue numbers from 2007.
Okay, so the government gives up $250 billion in revenue, how does that help the retirement situation? We’ve seen already that just by looking at their finances with another person, seventy-percent of people nearly double their annual savings, often up to 10% of their income.
Extrapolating that out, we take .7*10% of income/2 (because it doubled) = 3.5% increase in private retirement savings in exchange for a 3.825% reduction in tax revenue. Oh, well, looks like we hit a roadblock…Psych! We didn’t include the 30% who may have increased, but not doubled, their savings. Also…
Remember, we’re giving companies a 3.825% reduction in their cost of hiring, essentially 10 days of pay (260 workdays * 3.825% reduction in wages), in exchange for one day off, twice per year, for that employee to plan for retirement.
- What do companies have to do to get the deal? Offer a 401k.
- How many workers have access to one right now? Roughly 50%.
- How many would have access to one if employers got an effective 8 free days of work for sponsoring a 401k? Probably all of them.
Protecting the Lower and Middle Classes
Take into consideration the benefit of savings in a 401k; assets invested through a 401k program are shielded from bankruptcy.
Don’t give me that nonsense about how I’m robbing social security and taking from the poor. Let’s be real. This solution will bring bankruptcy-protected asset shelters to more people, and provide more security to the lower and middle classes than ANY policy passed in history. And it does so not by promoting welfare, nor poverty, but by promoting independence, savings, and generational wealth building.
I say give up the $250 billion in annual revenue because the benefits are far larger than the costs. We’ll see many, many hundreds of billions of dollars in new savings among part-time or full-time workers who had never previously considered life after work. Additionally, every person will now be paid a full day’s wage to go sit down and talk finances with a planner twice per year.
No bullshit, no nonsense, just solutions. Congress, are you listening?
Besides, doesn’t anyone see the benefit in reducing the cost of employment by 3.825% per year, residually? Talk about a jobs program! Don’t even get me started on jobs… When Bernanke starts sounding like a supply-sider it might just be time to get this show on the road.