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A
Story Theme
A
Story Theme: The Other Unreported Self Inflicted
Pension Crisis.
There
is another looming pension crisis that is going unreported, unnoticed,
and ignored as news of
Social Security and Pension woes overwhelm
us. People just do not know how to approach the retirement problem
that faces them.
Reliance on Pensions has declined while IRA importance has grown.
-
As
of year-end 2002, assets held in individual retirement accounts
(IRAs) were the largest component of total retirement assets
in the United States. IRAs accounted for $2.445 trillion or
24.1 percent of total retirement plan assets. This is a significant
increase from 1985, when IRAs accounted for 10 percent of total
retirement plan assets.
-
Defined
benefit plans have experienced a significant decline as a percentage
of assets in the U.S. retirement income system. In 1985, private
trusteed defined benefit plans accounted for 34.0 percent of
all retirement plan assets; by 2002, that percentage had declined
to 15.2 percent.
-
Source:
Employee Benefit Research Institute. (Updates previous year-end
2002 data with new information released by the Federal Reserve
in June 2004.)
The
overall result? People are not saving near enough for their retirements.
-
The
average account balance for plan participants in their 60s who
had been at their current job for two years or less was $14,275,
compared with $162,042 for participants in their 60s with at
least 30 years of tenure. The average account balance for those
in their 40s who had been at their current position for two
years or less was $10,756, compared with $82,996 for participants
in their 40s with more than 20 years tenure.
Source: Employee Benefit Research Institute.
How
to solve their dilemma?
-
Apply
the "Wealth Rule" from Wealth Odyssey on the largest
account balance encountered in the above fact we find that the
supportable retirement income excluding social security or the
rare pension is $8102.10 annually.
o $162,042 multiplied by 5% equals
$8102.10 annually.
o It would be unlikely that a person
with this large of a balance would live on such a low annual
income once retired because, if their standard of living was
this low (below poverty), they would already be supplementing
it by withdrawing from their account or would not have been
able to save this much in the first place.
People seem to refuse to accept the reality that
they need to put aside the
assets to fund their retirement years. Often, a reason is given
that "they can not afford to put the money aside for
retirement." The concepts in "Wealth Odyssey" such as
SOIL and "Wealth
Rule," suggest that no matter what your
standard of living, the resources to sustain that are relative.
In other words, you are not trying to sustain someone else's
standard of living; you're trying to sustain yours. Five, ten,
or more percent (the higher the percent the longer you put if
off) of your SOIL results in a savings number that is unique to
you. Yes, a higher income means a higher SOIL to sustain.
However, that means THEY have the problem of having to save more
dollars relative to what you have to save, assuming their SOIL
is higher. They have a different destination on their journey
than you do. Do what you need to do to arrive at your journey -
at least as best you can.
-
Establish a broadly diversified portfolio of assets (do not
chase returns).
-
Save more (this accumulates the assets, that will support
you later, faster).
-
Lower your SOIL (this reduces the amount of assets you need
to support you).
-
Lower your SOIL (this is also done automatically when you
save more).
-
Work longer (assumes you have the health to do this - do
this and you save longer and provide more years for the
portfolio to also grow - a multiplier effect)
-
Monitor your progress through your own benchmark - your "Progress
Line."
See "Expense
Categories in Retirement" (through this link) for a
further discussion on how to match retirement income with
retirement expenses.
Page updated 27 Feb 06
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