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The Retirement Challenge: Why You Are On Your Own

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This chapter is from the book
Learn how to survive in an era of Cradle-to-Grave insecurity.

Americans traditionally expected defined benefit retirement plans, had networks of family support, looked forward to a rich Social Security benefit, and saved generously.

None of that is necessarily available to tomorrow's retirees. You must assume responsibility for your own retirement in the new era of cradle-to-grave insecurity. If you don't, nobody else is going to do it for you.

Surviving in an Era of Cradle-to-Grave Insecurity!

The days when all you needed to do was show up reasonably often and reasonably sober over the course of your career to earn a guaranteed income for life at retirement are over! In the good old days, the entire cost and responsibility for providing that retirement was assumed by the employer, as reflected in Table 1.1.

Table 1.1. Roles and Responsibilities: Defined Benefit Plans

Function

Employer

Employee

Determines benefit level

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Calculates required contribution

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Makes contributions

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Makes investment decisions

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Responsible for shortfall in capital

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Pays plan administration cost

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Converts account to lifetime income

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Provides survivor benefit

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Provides pre-retirement death benefit

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Pays for investment advice

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Provides education and advice

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Under this type of plan, everything was done for you. You could be virtually brain dead and still expect a secure retirement.

Just 15 years ago, 70% of America's workers were covered by a defined benefit plan; all workers and their families were covered by a generous Social Security system. In our parents' time, the average employment was 25 years. Many employees had only one job their entire life; today, many people have a different job approximately every four years. Additionally, families were closer, and most expected to provide some intergenerational support. Even if this wasn't exactly cradle-to-grave security, it did take a lot of the uncertainty out of life.

That world doesn't exist anymore. Today, it's the Ownership Society—a euphemism for "sink or swim on your own resources." Depending on what type of organization you work for, the basic American retirement plan is now a 401(k), 403(b), or 457 plan. For-profit companies utilize 401(k) plans, whereas not-for-profit organizations have 401(k) or 403(b) plans, and state and municipal employees are covered by 457 plans or 401(k) plans. These plans are all very similar in that they require workers to decide on an adequate funding level, contribute all or most of that amount from their own pocket, develop a rational asset allocation plan, choose from a bewildering menu of substandard investment options, and, finally, determine how to convert their nest egg into a lifetime income. The employee-funded, employee-directed retirement is a new and disconcerting development.

Table 1.2 shows how the majority of responsibility shifts to the employee in the employee-funded plan (401[k], 403[b], and 457).

Table 1.2. Roles and Responsibilities: 401(k) and 403(b) Plans

Function

Employer

Employee

Determines benefit level

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Calculates required contribution

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Makes contribution

Matching contribution

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Makes investment decisions

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Responsible for shortfall in capital

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Pays plan administration cost

Rarely

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Converts account to lifetime income

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Provides survivor benefit

Account balance

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Provides pre-retirement death benefit

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Pays for investment advice

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Provides education and advice

Some

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No matter what happens to the current Social Security debate, benefits going forward (in real terms) will be a fraction of what our parents enjoyed. The national savings rate hovers near zero; during some months, it's negative. Average household savings for boomers is far too low to meet their retirement needs.

There's plenty of evidence that most Americans aren't up to the task of managing their retirement security. Workers are retiring earlier, often against their will. They are living longer and facing health costs that were unimaginable for their parents.

To put it kindly, the American pension system is one giant disaster area—a tsunami cresting over our heads. The time to take evasive action is now.

And help is not on the way! Investor literacy is almost nonexistent. You can graduate from high school without knowing how to balance your checkbook, graduate from college without ever taking an investment course, and get a PhD without ever hearing of asset allocation. Few accountants have ever studied portfolio construction, and most MBA programs and courses spend just one or two hours on the subject of portfolio construction.

The employee-funded retirement system—with some notable exceptions—is such a swamp that in many cases, the employee decides not to participate. Nationwide, it's an acknowledged failure. The system is plagued by high costs, poor investment choices, and insufficient education to enable employees to make informed decisions. As a result, it is little used. Many employees don't participate at all or fail to contribute enough to fund their retirement. Of those who do participate, many make consistently poor investment choices.

If the 401(k) system is a swamp, the 403(b) system is a sewer. Again, with some notable exceptions, it's a complete disaster for participants. However, it's a great way for unions and local governments to repay political favors and distant relatives. The kindest possible interpretation of the 403(b) system is that many of the people who administer it are hopelessly inept.

The great investment houses that might be expected to provide assistance are instead bent on the plunder and pillage of their clients' accounts. Wall Street's commission-based sales system is so corrupt, it can't be fixed. Not everybody at every brokerage is a crook, but the incentives are all wrong. The commission-crazed sales system taints the entire advice model. You can't rely on getting either competent or objective advice there.

The cops (both state and federal regulators) allow toxic products to foul the retirement system. Conflicts of interest and undisclosed costs are universally acknowledged and little punished.

So, there it is. You are entering an era of cradle-to-grave insecurity. You and only you are going to be responsible for securing your financial future. You are left to your own devices to figure out this system. That's what the Ownership Society is all about. You are not moving toward a kinder, gentler society. The safety net and lifeline are disappearing. You will either sink or swim depending on your own skill.

You are on your own. You must educate yourself, take responsibility for your financial future, and design and execute a viable investment plan for yourself. If you don't, it's highly doubtful that anybody else is going to do it for you.

Given all that, if you would like to survive in the new society, it's time for some swimming lessons—or maybe it's time for you to start building your very own life raft.

If you can't swim and suddenly find yourself alone in deep water, the last thing you want to hear is a detailed lecture on fluid mechanics or how to calculate buoyancy. Someday you might get interested in those subjects, but the immediate need is to keep your head above water and get yourself moving toward safety. Likewise, The Retirement Challenge: Will You Sink or Swim? is not going to turn you into a financial economist, accountant, or analyst. However, you will be able to invest your retirement accounts and personal savings simply, quickly, economically, and effectively to meet your long-term goals.

The Retirement Challenge: Will You Sink or Swim? will teach you those essential survival skills needed to navigate serenely to a safe harbor through the nastiest financial storms likely to be encountered on your journey.

Let me be completely clear. The author of this book is the swim coach. You are the swimmer. Reading this book will not make you financially secure. Learning everything about pensions will not lead to a prosperous retirement. Only saving and investing effectively will do it—and only you can make that happen.

Let's suspend disbelief for a second and pretend that you meet with the world's best investment advisor. If you don't have any capital, and you don't have the ability to save, the advisor can't do anything for you. Without serious commitment on your part, you and the advisor have a pleasant conversation and you go on to be a financial failure.

It is ridiculously hard for anybody in reasonable health to drown in calm, warm water. It's a very benign environment. Almost everyone should be able to float for days and swim for many hours. You don't have to be strong, smart, or brave. Simply roll on your back, put your head down, relax, and breathe normally. You will float serenely. Then just kick a little and sweep your arms around to swim for miles. Arrive on that distant shore relaxed and refreshed.

And yet people do drown. Why? You would have to do just about everything wrong. Panic and lack of knowledge sink them. Drowning swimmers are often their own worst enemy. Instead of conserving energy and floating comfortably, the swimmers flail around in total panic, quickly exhausting themselves and insuring early demise. A tiny bit of knowledge and discipline would save them.

In the same manner, most investment tragedies are self-inflicted wounds—totally predictable, but completely avoidable. The world's stock and bond markets are remarkably benign. With just a little planning and minimal effort, you can confidently expect to have a comfortable and secure retirement.

Wall Street sharks are the most vicious kind, world famous for their remorseless search for unwitting prey. Fortunately, you don't have to be dinner for them. The Retirement Challenge: Will You Sink or Swim? provides you with tested repellent to fend off these dangerous critters.

The pace of modern life doesn't give you time to do all the things you "ought to" do. Unfortunately, most of us are swamped with competing obligations. The average American considers investment planning almost as much fun as doing taxes. But, taxes have an April 15th deadline and investment planning doesn't. So, it's far too easy to push the planning process to the back of the desk for another day. The danger is that it will linger there, gathering dust until you wake up one day to discover that time has passed you by, and you have neither a plan, nor any investments. So, the first goal of The Retirement Challenge: Will You Sink or Swim? is to make this process quick and easy so you can get on to the fun things in life, while knowing that you will probably be in the top quartile of investors over your career.

So, can retirement planning and investment be easy, simple to understand, painless and quick to execute, effective, and economical? The author guarantees it. Read on. The Retirement Challenge: Will You Sink or Swim? is your life vest in turbulent financial waters.

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