Читать книгу Money Minded Families - Stephanie W. Mackara - Страница 9

When people first started “retirement planning,” their focus was often on what was known as a three-legged stool. Each leg of the stool represented a foundation of financial support to count on during retirement, removing the fear of outliving personal resources. The three legs were employer-defined benefit plans or pensions, Social Security, and personal savings. The personal savings leg of the stool was typically used to fund the proverbial “bucket list” while the Social Security and pension supported most people's day-to-day living expenses.

Retirement planning forecasts were then filled with excellent news. We had great “pensions”; many committed to paying private or federal employees the average of their top-three working years for the rest of their lives! They were getting paid the same amount in retirement as in their top-earning years; a lucky few have actually earned more in retirement than in their working years! The government provided Social Security, incomes were growing, access to more luxury items was available, and most people were working fewer years so that they could enjoy all the wonderful bounty! Life was great.

But things have changed for most Americans.

In the previous chapter, we discussed the dramatic decline in the labor force for men age 65 and older at the beginning of this century. What do you think has happened since then? We have seen a marked increase in the labor participation rates of older men, and women, too. In 2009, more than 36% of men ages 65–69 were actively engaged in the workforce. Remember this same participation rate was only 18.4% in 2000. These numbers have similarly increased for men age 70 and older (Source: Older Adults' Labor Force Participation since 1993: A Decade and a Half of Growth, January 2010, Richard W. Johnson and James Kaminski).

Why have Americans started working into what just a few years ago we considered “retirement”? There are many reasons of course. To start, wages have become stagnant, and healthcare and education costs have increased astronomically. Combine this with the disappearance of most private pension systems and a broken Social Security system, and we now have an environment where “retirement” is an elusive concept. Increased personal and national debt also continue to eat away at our ability to both save and invest.

Remember how generous American Express was in 1875, offering the first private pension for their retired employees? In 2009 they decided it was simply unsustainable and stopped offering these generous pensions. American Express is not unlike many other corporations that simply can no longer afford to pay pensions to their employees. Instead, most have replaced traditional pensions and defined benefits with defined-contribution or what most of us know as 401(k) plans. These plans require employees to save their own money for retirement. This ends up morphing two of the three legs of the retirement stool together, creating a great imbalance toward your personal savings.

Consider how much a household needs to spend during their retirement years. For those who entered retirement in the 1970s, the typical income replacement rate was about 65% of pre-retirement income, meaning, if you earned $100,000 a year, you would expect to need $65,000 each year in retirement to maintain your current lifestyle. The $65,000 was covered by those three legs of the stool: Social Security, private pension/retirement plan, and personal savings—mostly, if not all, the Social Security and private pensions.

Using the three-legged-stool example made it easy to understand how much you would need to save for retirement because two of the three legs were static and easily quantifiable. That is, you knew if you retired at 65, you would receive a fixed amount per month in Social Security and a fixed amount per month in pension. These figures may have grown slightly with inflation, but for the most part these were fixed figures. Most individuals entering retirement had little to no debt, so their day-to-day expenses were relatively low as compared to their pre-retirement needs. The only variable was what you contributed toward you own retirement income. For a great number of people, pension and/or Social Security was enough to cover everything.

Today, the three-legged stool has lost two legs and can barely support retirement income needs. Most companies are no longer providing pensions, or the pensions are insolvent. A July 30, 2018, Wall Street Journal article cites that the pension hole or deficit owed to employees for US cities and states is the size of Germany's entire economy. Pause here for a moment. Take that in: the deficit owed to US city employees is the size of Germany, the fourth-largest economy (ranked by GDP) in the world! This is just an enormous debt that continues to grow every day. Social Security has been modified over time and is not sustainable at its current levels. The latest report from the Social Security and Medicare Board of Trustees (as of 2018) suggests that in 2034, Social Security will only be able to pay out at 77% of retirees' benefits and those benefits will be starting later and later in life. Like city pensions, the Social Security commitments continue to grow and, as a country, we continue to brush aside the enormity of the issue. The answers aren't easy, but they are doable with strong leadership. We either cut benefits, increase the benefit age, increase taxes, or borrow from somewhere else in the government to fund the deficit. Each of these has been discussed, but never implemented because, politically, the solutions aren't popular. As a result, here we sit, waiting and watching for it to blow up, not clear when it will happen or who will get this third leg of the stool pulled out from beneath them.

So, today, most of us are left with one source of retirement savings—ourselves. Not only have two stool legs of support been removed, but our planning must now replace 80% of our pre-retirement income because we are living longer, healthcare is more expensive, and our personal debt—either by way of mortgages or student loans for ourselves or our children—tends to stay with us a great deal longer and often into retirement.

One of the greatest financial accounts created was the 401(k), or the defined-contribution plan. As we previously discussed, this was created to replace many corporate private pensions and allow individuals to save pre-tax dollars toward their retirement. What most people don't know is that it was never created to be the main source of employee retirement savings it is today. The accidental retirement revolution began in 1978 when Congress passed the Revenue Act of 1978. The Act included a provision, Section 401(k), that gave employees a tax-free way to take money from bonuses or stock options and save without paying taxes, deferring them to some future date. A gentleman named Ted Benna, a benefits consultant at the Johnson Companies, is today regarded as the father of the 401(k). When working with a client who wanted to provide benefits to its employees and also incentivize its employees to save, Ted Benna advised that the new Section 401(k) of the Revenue Act of 1978 could be the solution they needed. There wasn't anything explicit or hidden in the code that said the modern version of the 401(k) could be used as an Employer Deferred Compensation Plan, but there also wasn't anything in the code that said it couldn't. Through some creativity and a bit of a fluke in helping his client, Ted Benna created the first 401(k) plan.

Based on Benna's work, in 1981 the IRS issued rules that allowed employees to contribute to accounts through salary deductions; this created efficiency and scale and jumpstarted the widespread rollout of the plans in the early 1980s (Source: 401(k)—Forty Years Later, Ted Benna).

There was a great deal of concern that pensions would go away, and in fact they did, not because of the 401(k), but in spite of it. In just a few short years from its creation, large companies began to offer the 401(k) plans, mainly because it was less expensive than funding pensions and was more predictable to fund. Over the years the contribution amounts an employee is able to save through deferral have increased, including a catch-up contribution for those over 50. Starting in 2020, the total employee deferral can be up to $19,500 with a catch-up of $6,500; so those over 50 can put as much as $26,000 into their 401(k) accounts.

Many companies not only provide the 401(k) plan, they also match or contribute 4% or more of the employee's savings. For instance, for an employee earning $50,000, if the employee participates in the plan, most employers will offer to match the first 3% of their salary deferral amounts and then 50% up to 5%. Confusing, but simply, if the employee defers 5% of their salary toward the 401(k), the employer gives them 4% of their salary in savings—we call this free money! In total the employee is now saving 9% or $4,500 a year.

This is a great way to start saving, but it cannot be the only place one saves toward retirement. In the above example, savings of 5% with a company match earning $50,000 over 35 years with a 6% return will get you approximately $538,000 to use for retirement income. This is a nice nest egg, but if it is your only leg of the stool, it most likely can't sustain your entire retirement income needs. Instead, save more, save early, and save often (more on that later).

As I write this, I am a 45-year-old financial advisor. As a financial advisor, I see that even many educated people with great means are not in control of their own financial situations and their spending, and savings are not on track to being able to retire comfortably. This could be because we as a nation simply have not focused on teaching the basics of becoming financially healthy—honestly, because most of us never had to. Now, as I look to the future, I fear not as much for my mom or her peers, or even for myself, but for my son and his friends, cousins, and peers—for our children and the next generation. Today we are faced with an unprecedented culmination of events. As a nation, we are woefully unprepared for the effects this will have on our schools and communities. The three-legged stool has been flipped on its head by a three-headed monster:

 Personal debt or consumer debt is at $13.86 trillion, primarily school loans, which are second only to mortgage debt.

 National debt: according to the New York Times just the interest payments on the US national debt will overtake Medicaid costs in 2020 and the Department of Defense budget in 2023.

 Decreased corporate and government support for retirement: in 2018, for the first time since 1982, Social Security will pay out more than it takes in, with a projected date to run out by 2034.

Our country's financial foundation is no longer stable and the only way to fix it for ourselves and future generations is to take charge and DIY (do it yourself). The financial changes our country is faced with make it so important for us to shift our thinking from allowing our children to take minimal personal responsibility and acquire limited financial knowledge, to consciously increasing the level of education our children receive relative to financial matters. The next few generations don't have the luxury of waiting until age 50 or 60 to pay attention to their financial wellness and money management habits.

With so many factors beyond our control and so many new financial complexities offered as solutions—such as investment products and potential debt offerings solutions—taking financial control can feel completely overwhelming. Yet instead of burying our heads in the sand and wishing, hoping, and maybe praying that someone or something will solve the financial puzzle for us, we must take control. We cannot rely on government or private corporations so we must grab the bull by the horns and take it for a ride. The silver lining is that by creating good habits and being disciplined, you can succeed at becoming financially well. By starting your children off with positive financial habits at a young age, you'll help them have a greater chance of absorbing and implementing those habits in their adult lives. Learning to save, spend, share, and invest wisely, along with positive financial socialization and a positive relationship with money, are the key ingredients to your personal (and your child's) financial wellness and future retirement.

There is a movement that started that you may have heard of called FIRE. It stands for Financially Independent Retire Early. This movement was led by a Canadian named Peter Adeney, whose pseudonym, Mr. Money Moustache, has a cult-like following. He retired at the age of 30 and shares his wisdom with others to help them do the same. There are lots of naysayers about the FIRE movement. The two biggest gripes I have heard is that the group tends to make work sound bad and the sooner you can stop working the better, and that it’s practices require extreme frugality. Though participants within the FIRE movement tend to be more frugal than most, the group is made up of all different kinds of people in many different circumstances and in fact, though Mr. MM started the trend, there are now many different factions. And, about the “not working” concept—this isn't at all what the movement is about; it's about being financially independent. Financial independence doesn't mean the end of a working career. In the words of Mr. Money Moustache himself, it means “complete freedom to be the best, most powerful, energetic, happiest, and most generous version of You that you can possibly be.”

This movement isn't for everyone; in fact many find it to be too constricting in terms of spending. I am lucky enough to be in a few groups with people who are part of the FIRE movement and what I most enjoy about them is they all come from different backgrounds, with different experiences, but they are all very curious and active when it comes to making smart financial decisions and they are always, always willing to share and support and celebrate each other. Being frugal used to be labeled as depriving yourself; this group has turned being thrifty into liberation. Though not for everyone, its mere existence is evidence that we as a society are taking the bull by the horns and developing strategies to make sure one can be financially independent and not rely on a government or a corporation to dictate when and what our retirement will look like. Though my lifestyle isn't perfectly aligned with the FIRE movement, the message it sends is one I can get behind. We control our financial destiny and as a result must be a mindful, active participant.

So, what will the big R look like for our children? Will we return to the preindustrial age where retirement didn't even exist or will only be available to the 1% as a luxury? Or will we find new and different ways to earn money, spend money, and save money? Will there be new ways to age, new algorithms to better plan for retirement, new government or social supports to fund our lifestyle once we stop working? Will we change the way we work, searching for purpose instead of a paycheck? Will there be stages to our “end of working years”? All of this is unknown, but what we do know is that technology will surely make it easier to continue to earn money in ways we haven't even considered today—in ways that may incur less stress or physical burden on our bodies, much of the reason people stop working today. Will the idea of retirement change completely? Perhaps, but no matter the changes, our children will still need a strong financial foundation in order to help them live their best lives.

We are facing a great burden for our children, one that none of us have experience with, but one that we must prepare for. I have great hope that educating our children on matters of both financial wellness and financial literacy while preparing them for the burden that lies ahead will allow them to change the tenor of their future and of future generations. There is so much to fix, but it is fixable. There is much work to be done and we as parents are privileged to help our children get it done.