Planning for Retirement Just Got Much Harder
If you thought planning for retirement was difficult, it just got a lot harder.
That’s because saving for retirement must now account for two major life changes: you are living longer and you won’t make much on your investments.
Now, living longer is considered a good thing since science and medicine can do wonders. The flip side is that the quality of life for millions of people who have too little to live on is not enticing.
Here are two news events that show that retirement will become a dream for many people.
First, a new report by David Blanchett, Morningstar’s head of retirement research, and Michael Finke and Wade Pfau, who both teach at The American College of Financial Services found that the international equity premium historically “has been three to five percent,” says Blanchett. “So, if the long-term averages hold, we can’t expect returns to stay as high as they’ve been historically in the U.S.”
A bad combination: People living longer, but with less money.
On the longevity side, men and women at age 65 will live 10% longer, according to the Society of Actuaries. Men who reach age 65 can expect to live to an average age of 86.6, and women to 88.8.
But on the investment return side, the numbers are going in the other direction. Since historical rates of return are projected to continue to be lower, the only other variable which makes a difference is savings. In this regard, people who wanted to maintain their pre-retirement incomes (a noble goal) would need to save (starting at age 25) a total contribution from their 401(k) and employer contributions of 4.3% for low earners and up to 9% for high earners, assuming historical rates of return. In a low-return situation, the best saving rates ranged from 7% to 16%.
Now, these savings rates require significant discipline. In a capitalist, consumer-based society this is difficult to do. When you add in the Trump administration’s stated goals of cutting Social Security, Medicare and Medicaid, the problems get worse.
Trump’s appointees would cut Social Security even though Social Security, the nation’s our most efficient annuity program, even though 61% of retirees rely on it for at least half their income, according to the Social Security Administration. If this sounds cruel, Trump has already pushed to cur the Affordable Care Act that would leave millions without health insurance. He would do the same for Social Security if it would propel his John Birch Society agenda.
Second, on March 30, 2017, Senate Republicans in the Senate voted 50-49 to roll back an rule passed by the Obama administration that would allow states to create retirement accounts for low wage workers in the private sector who don’t get retirement benefits from their employers. The measure was previously passed by the House in February 2017 and it now goes to Trump’s desk for a signature.
Under this pro-worker rule, states could set up auto-enrollment IRAs for private sector employees. Those employees who did not have access to IRA accounts could then contribute to their IRAs via payroll deductions. States would administer the plans and be responsible for investing employee contributions or with providing employees with a list of investment options. Republicans opposed the plan since it would cut into the very lucrative 401(k) business now dominated by major global banks and investment firms.
Retirement Planning in the Trump Era
So where does this leave people planning for retirement in the Trump era?
The current retirement crisis has been developing for decades under both political parties. The reality is that no one in Washington cares about retirees unless they can be brought into a solid voting bloc. The seething populism that is engulfing the nation does not have a specific retirement improvement platform. Health care, cutting taxes, raising the military budget capture the stage, but retirement is too depressing to discuss at the national level. Only AARP speaks on behalf of retirees and they often get distracted since they are pushing insurance over retirement policy.
Financial planners also drop the ball since they too are product salespeople, not political-economic reformers. They are commission generators and not retirement activists.
So retirees mostly are on their own. Retirees should unite against cuts in Medicare, Social Security and Medicaid. Those are the services that will make or break the incomes for millions. Retirees should also assume that the American Dream of retiring with financial security is over. Now, that is really something to tell your grandchildren.