Monday Morning Quarterbacking

We've all heard stories about folks still working in their golden years because they can't afford to retire. While this is often due to forces beyond their control, there are also common but avoidable planning mistakes to learn from.

Along these lines, The Wall Street Journal has been running a series highlighting the plight of average Baby Boomers struggling to afford to retire. Titled Unprepared, the series looks at the lives of real people through the broader lens of what the Journal accurately portrays (in my words) as the slow-motion train wreck of many Americans reaching retirement age and largely being, well, unprepared.

I've been a financial planner long enough to have heard many stories and met many people who have made mistakes in the categories listed below. I don't think they're unintelligent or otherwise unworthy. Sometimes life gets in the way and our best laid plans fall by the wayside.

Often, clear solutions are only visible with perfect hindsight. My intention is not to mock but to raise awareness, so you don't repeat the mistakes of others.

The Journal article lays out four core retirement planning issues and I've commented on each:

Continue reading...

High personal debt levels

There's a power trio, of sorts, that has been playing the tune for many in our economy for a long time: low wage growth, low savings rates, and low interest rates that encourage borrowing. Put these together any way you want, and it spells long-term trouble for people saving for retirement. Consider a common scenario.

It seems like you can never save any money because your wages aren't keeping pace with inflation. You get a credit card offer in the mail with what seems like a low interest rate. You put that unpaid dental bill on the card and try to pay it off later. You miss a payment and the low introductory rate jumps to over 20%. You transfer the balance to a new card, also with a low introductory rate. Later, after missing another payment and getting another rate bump you dip into your 401(k) to pay the debt off for good and promise you'll start saving more next month.

This happens across the demographic spectrum. The article states, "The percentage of families with any debt headed by people 55 or older has risen steadily for more than two decades, to 68% in 2016 from 54% in 1992", and further that, "Americans aged 60 through 69 had about $2 trillion in debt in 2017, an 11% increase per capita from 2004, adjusted for inflation. They had $168 billion in outstanding car loans in 2017, 25% more per capita than in 2004. They had more than six times as much student-loan debt in 2017 than they did in 2004."

How can anyone possibly save for retirement while struggling to make payments on credit cards, car loans, mortgages...?

Paying off student loans for the kids

According to government stats, Americans owe over $1 trillion in student loans. The average borrower owes over $30,000 and climbing. This trend isn't expected to slow anytime soon, so a growing number of parents are withdrawing money from their retirement accounts to pay their kid's student loans. Add this to the already high personal debt levels referenced above and you have a situation that is simply unworkable.

This is where you really need to "pay yourself first", as the saying goes, and should be viewed differently from helping an ailing family member, for example. With education, your child has the ability (at least in theory) to pay down the debt during decades of work. Hopefully the investment they make in themselves will pay off over time, but shouldn't it be their burden?

This is a tough and personal decision that you should go into with eyes wide open. Do some analysis and planning to determine how big a hit your retirement might take if you paid off a chunk, or all, of your kid's student loans. And it's best to do this kind of analysis before the student, or you, takes on the debt in the first place.

Low personal retirement savings

It used to be you could work for a company for 30 years, collect your gold watch and a pension, and sail off into retirement. As you're no doubt aware, those days are mostly gone. But the history (in brief) of how that happened is interesting.

According to the Journal article, the first traditional pension plans started in the 1880's but really took hold in the early 1900's. By the 1980's, nearly 46% of workers were covered by some sort of employer-provided pension. Enter a recession and inflation in the 1970's and employers were looking for a way out of what they saw as expensive life-long benefits.

Then in 1978 Congress wrote a new section into the tax code to benefit executives who wanted to shelter excess pay from excess tax. The 401(k) was born and lead to massive unintended consequences. Many pension-providing employers sought to change to new 401(k)'s and transfer risk to the employee. The business would get to spend a lot less money and the employee would get to invest their own however they wanted, along with some extra from the business to sweeten the deal. Sounds great, right?

Unfortunately, there have been huge disparities in savings rates and investment performance between white-collar and blue-collar workers in the decades since. Stories abound of workers generating millions in their retirement plans but far and away the typical saver's experience has been lukewarm at best.

According to the Journal article (citing research from Boston College), "... households with 401(k) investments and at least one worker aged 55 through 64 had a median $135,000 in tax-advantaged retirement accounts as of 2016. For a couple aged 62 and 65 who retire today, that would produce about $600 a month in annuity income for life".

Add that to the average Social Security benefit in 2018 and you get about $2,000 per month. Could you live on that?

Dipping into savings to care for aging and ailing parents

As life expectancies rise, retiring Baby Boomers are frequently saddled with worries like "What to do about Mom (or Dad)?" as they consider their own retirement plans. "Mom" might be the recipient of one of those traditional pensions mentioned above but have precious little cash or investments to be able to fund unexpected expenses.

According to the Journal article (quoting the Kaiser Family Foundation), since 1999, worker's contributions to health insurance premiums has risen by 281% during a period where average inflation was just 47%. And in 2013, for example, medical spending took up 41% of the average Social Security Benefit of $1,115.

None of this is expected to improve anytime soon and with two generations confronting the problem during retirement, it can create twice the strain. The result is kids pulling money from their retirement accounts to help pay their own unexpected expenses, plus some of Mom's, whether they can afford it or not.

There's no easy way to address this issue. You can't buy insurance after you need it and planning to downsize Mom into a smaller place isn't a silver bullet either.

Ideally, folks add risks like these into their retirement planning to gauge impact early on. But again, it's hard to do so since you don't know when, how much, and for how long the family member will need support; an unfortunate trio but one you shouldn't ignore.

So, the takeaway is that planning should be done early and often. It's the only way to know if you're on the right track to retire where, how, and when you want to. Avoid it and you're risking making the planning mistakes already made by so many others.

Here's a link to the article if you'd like to read further. The Journal has a paywall that may not let you access the article if you're not a subscriber. Give it a try and see what happens.

Have questions? Ask me. I can help.

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