Do More Americans Feel Confident About Retirement? by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 28, 2015
IN THIS ISSUE:
- 70% ‘Say’ They Feel Confident About Their Retirement
- A Retirement Crisis Still Looms in the Years Ahead
- Some Terrible Investing Advice For Millennials & Anyone
70% ‘Say’ They Feel Confident About Their Retirement
More Americans say they are feeling more confident about their retirement. That’s according to the results of the latest “Retirement Confidence Survey” conducted each year by the non-profit Employee Benefit Research Institute (EBRI). The Washington-based EBRI is the leading source for data on savings, retirement, health and related issues.
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In their 2015 survey, some 37% of all respondents said they feel “very confident” about their retirement, and another 33% said they feel “somewhat confident.” The problem is that many Americans ‘say’ they are confident about having enough money to retire, even though they have nowhere near enough money stashed away.
As we drill deeper into the latest retirement survey, we find that overall only 22% of current workers are now very confident about having enough money for a comfortable retirement and 36% are somewhat confident, according to the 2015 study.
In another important finding, retirement confidence for most Americans depends on whether or not they (or their spouse) participate in an employer-sponsored retirement plan, such as a 401(k). Company-sponsored 401(k)s, especially those in which the employer “matches” a portion of the employee’s contributions, are like a magnet for retirement saving.
Perhaps the most important finding in the study was the fact that workers with a company-sponsored retirement plan are more than twice as likely as those without a retirement plan to be very confident – 28% with a plan, as compared to only 12% without a plan.
While the findings above are somewhat encouraging, it is important to keep in mind that many respondents overstate the amount of retirement savings they actually have, and just as critical, under-estimate how much money they will actually need in retirement.
A Retirement Crisis Still Looms in the Years Ahead
In the aggregate, savings remain relatively low and only a minority of Americans appears to be taking the basic steps needed to prepare for retirement. A sizable percentage of workers reported having virtually no savings or investments. Among workers responding to EBRI’s survey, 28% say they have less than $1,000 saved for retirement.
The latest survey found that over a third of workers feel they are “far behind” schedule in their saving for retirement, and another one in four feel “somewhat behind” schedule. In all, 64% of all respondents feel that they are behind where they want to be when it comes to planning and saving for retirement.
The rising cost of living and difficulty meeting day-to-day expenses top the list of reasons why workers say they aren’t saving for enough retirement, according to EBRI. But many workers also say they could save a small bit more for retirement.
For instance, 69% of workers said they could save $25 more per week than they are currently saving. FYI: If you saved $25 more a week for 30 years in an account earning 5%, you’d accumulate about $90,000 more in your retirement nest egg.
Sadly, over half of workers reported that they (or their spouse) have not calculated how much money they need to have for a comfortable retirement. This is despite the fact that there are numerous retirement calculators available on the Internet, most of which are free of charge.
Any discussion of a looming retirement crisis would be remiss not to comment on the wave of Baby Boomer retirements that is already upon us. It is not news that Baby Boomers, people born between 1946 and 1964, are starting to turn 65 and beginning to retire in droves. The nation’s 75 million Boomers are retiring at a rate of one every nine seconds and this will continue through 2029.
There are just over 40 million Americans age 65 and older, and they make up over 13% of the population. By 2030, when all the Baby Boomers will have passed age 65, the over-65 crowd will reach 20% percent of the population. At that time, the median age of Americans will increase to 39.6 years, up from just over 37 today, and a significant increase from just under 30 in the 1960s and ’70s.
The US is not the only country with an aging population. Canada, Japan and most of Europe have older populations than the US.
There are 11 US states with more than a million people age 65 and older, led by California with 4.3 million. The other states with the highest percentages of people age 65 and older are Florida, West Virginia, Maine and Pennsylvania. The states with the lowest proportions of senior citizens are Alaska, Utah and Texas.
The average life expectancy for a 65-year-old American today is 17.7 years for a male and 20.3 years for a female. That represents three to four more years of life expectancy compared to what the prior generation had at the same age.
The average income for those between ages 65 and 69 is $37,200, but drops to a little less than $20,000 for those over age 80. According to the EBRI, an increasing number of people age 65 and above continue to work at least part-time, even though they are officially ”retired.” Among those, the main sources of income for people over 65 are Social Security (37%), income from working (30%), pensions (19%) and savings and investments (11%).
About 65% of workers retire by the time they turn 65, but that number is falling as more people continue to work beyond 65. Of those still working past that age, over a third are employed part-time. People with higher education, as well as divorced women, tend to stay in the workforce the longest.
Here’s the bottom line for Boomers when it comes to retirement. According to Fidelity Investments, the average US Baby Boomer has only $147,000 in their 401(k). The number is higher for Boomers who have contributed to their 401(k) for 10 consecutive years, at around $250,000.
Either way, that is not enough, even with Social Security, for most Boomers to fund the lifestyle they had hoped for in retirement. The common 4% annual retirement savings withdrawal rate, for example, dictates that $250,000 would provide only $10,000 a year in retirement income.
In summary, despite some reports to the contrary, and despite the fact that stocks and bonds are at or near record highs, a retirement crisis is still in our future.
Some Terrible Investing Advice For Millennials & Anyone
Shifting gears just a bit, but staying on today’s topic of investing for retirement, I want to turn our attention to what I consider to be some of the worst investment advice I have seen in my 38 years in this business.
The terribly misguided investment advice came from one James Altucher in the form of a video posted on the popular BusinessInsider.com website on April 20. The investment advice was so controversial that numerous financial writers took serious issue with it almost immediately.
The very next day after Altucher posted the video, respected Barron’s financial writer Jack Otter ripped it to shreds (see link below). And the next day, April 22, one of Business Insider’s own editors, Andy Kiersz, (see link below) took Altucher to task. Others have weighed in as well to criticize Altucher, including Motley Fool writer Morgan Housel, who gave perhaps the most detailed report on the egregious advice offered by Altucher, which I will summarize below.
By the way, Altucher is a best-selling author of several books, an entrepreneur and reportedly a hedge fund manager. I must admit, however, that I had never heard of him before last week. Since then I have perused Altucher’s website to learn more about him. What I conclude is that he is one of those writers that chooses to be controversial just for the sake of being controversial – whether his musings make much sense or not.
So what exactly did James Altucher have to say in his latest controversial video? Basically, Altucher argued that investors and savers, especially younger ones, should avoid and/or abandon their employers’ 401(k) plans. Here are the highlights (or lowlights) of what he had to say.
“I’m going to be totally blunt. Are you guys in 401(k)s? OK, you’re in 401(k)s. I honestly think you should take your money out of 401(k)s… You have no idea what’s happening to your money.”
False! Everyone who wants to know what is happening in their 401(k) can see exactly what’s happening with their money. You can see exactly what funds you’re invested in, and usually even the individual securities those funds invest in – if you want to. These disclosure requirements are legal obligations of the 401(k) administrator and the managers investing the money.
“And, by the way, if you want that money back before age 65, which is 45 years from now, you have to pay a huge penalty.”
First, this statement assumes you are 20 years old today. Second, he fails to mention that the “huge penalty” is only 10%. The truth is, you can take money out of a 401(k) without penalty starting at age 59½. You can also roll 401(k) money into an IRA and use it for a down payment on a first home or for college tuition or for certain emergencies without penalty.
“They’re doing whatever they want with your money. They’re investing wherever they want.”
The fact is, there are no 401(k)s where someone does “whatever they want with your money.” All 401(k)s are heavily regulated by the Department of Labor and have to abide by strict investment standards under the Employee Retirement Income Security Act of 1974. Those rules require that you, the worker, have control over how your money is invested. Here’s what the DOL rules require:
“There must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile.”
This is not to suggest that all 401(k)s are good. There are still some that offer less-than-attractive investment options, often with high fees, but these are becoming increasingly rare. Someone at your company has a legal duty to provide a variety of investment options for you to choose from. You should talk to them about any concerns you may have. Altucher goes on:
“They’re paying themselves salaries.”
Shocking! Yes, mutual fund managers are paid a salary. And 401(k) plan administrators also are paid for their services. Who provides services to you that doesn’t earn a fee? Basically no one. Come on, Mr. Altucher!
To be fair, some fund managers are overpaid. But skipping a 401(k), the employer match and decades of tax-deferred returns because the people managing them are paid a salary is madness. Plus, fees have come way down in recent years. Here’s a report by the Investment Company Institute that tracks money flows into and out of mutual funds:
The expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000. In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity funds. By 2013, that figure had fallen to 0.58%, a 25% decline.
What does Altucher say to do with your money instead of saving it in a 401(k)? Now he really gets ridiculous!
“Hold on to your money. Put your money in your bank account.”
Really? You’ve got to be kidding! Interest on bank checking and saving accounts today is next to nothing – less than 0.30% for most interest-bearing checking accounts last time I checked. You know this and I know this.
Apparently, Altucher believes that people don’t make money in 401(k)s. He claims:
“The average 401(k) – they won’t really tell you this – probably returns like one-half percent per year.”
This is also ridiculous. According to a study of 401(k) investors by Vanguard Group, for the five years from 2008 to 2013, participant total returns averaged 12.7% per year. The average return from 2002 to 2007 was 9.5% per year. Even from 2004 to 2009, which is one of the worst five-year periods the market has ever recorded, the average 401(k) investor in Vanguard’s study earned 2.8% annually.
There’s a good reason why investors tend to do better in 401(k)s than in many other investments. The rules designed to make it difficult for people to take money out of a 401(k) until they retire are good for investors; as a result, they tend to leave their investments alone without jumping in and out of the market, often at the worst possible times.
The majority of 401(k) investors “dollar-cost average” by contributing a portion of their salary every month and never touch their investments until they retire. That is great! If more people did this, many more people would have a comfortable retirement ahead of them.
Yet Altucher even has a problem with tax deferment:
“You don’t really make money in a 401(k). It’s just tax-deferred. When you’re in your 20s, what does tax-deferred really mean?”
He’s got to be kidding! What does it really mean? If you invest $10,000 a year in a 401(k) or an IRA, you’ll earn almost a million dollars more ($869,197 at an 8% return) over 45 years than in a taxable account. This guy is totally off his rocker. Here’s Altucher’s final takeaway:
“What you should do in your 20s and 30s is invest in yourself. Building out multiple sources of income, investing in getting greater skills, and so on.”
Nothing wrong with that advice, but you can do all of that and still invest in a 401(k). And virtually everyone should. The bottom line is: Don’t believe everything you read, especially from writers who are willing to be controversial just to get publicity – good or bad.
In closing, it is sad that writers like the one mentioned above offer such bad advice that could negatively affect investors, especially younger folks who might believe what he said. I am happy that numerous financial writers were quick to criticize the latest terrible advice from James Altucher. I couldn’t agree more.
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Gary D. Halbert