Burgess COMMENTARY

Peter Burgess

Train Wreck in Slow Motion (Part V): The Retirement Savings Crisis

Earlier this month, a Wall Street Journal op-ed by Andrew Biggs and Sylvester Schieber (“The Imaginary Retirement-Income Crisis,” which reprised their January article, “Retirees Aren’t Headed for the Poor House”) attempted to debunk the long held belief that Americans lack adequate retirement savings. Their methodology, which is built around the notion of “career average earnings,” is flawed and their conclusions are dangerously misleading.

Financial advisors, money managers and other financial services professionals can uniformly attest to the gap that exists between what individual investors expect to live on in retirement and what they are likely to have, based on what they've accumulated to date.

Indeed, the financial professionals I work with and talk to every day tell me the single biggest fear their clients have -- the single most intensely emotional source of investor anxiety -- is that they will not have the resources to fund the quality of life they want in retirement or, even scarier, that they will outlive their savings.

They are right to worry.

According to a whitepaper authored by BlackRock Vice Chair Barbara Novick, “less than 60 percent of workers are saving for retirement,” and the majority of those that are saving have accumulated $25,000 or less. That is nowhere near enough to live on in retirement. Add the burden of financing a child’s college education or caring for ailing parents or paying inexorably inflating out-of-pocket health care costs, and the adequacy of the amount of money many Americans have accumulated for retirement is even less.

The problem is getting worse, not better.

An article by Frances Denmark in September’s Institutional Investor coins a new phrase: “catastrophic longevity” to describe “the risk that people will live a lot longer than anyone had imagined.” It’s not news that life expectancy has increased over the past century. What’s surprising is how quickly it continues to increase: by more than 2.2 years on average over just the past decade alone, according to Denmark.

I asked CFA luminary Charley Ellis what he thought about Biggs’ and Schieber’s suggestion that, despite numerous studies that suggest otherwise, Americans will have “enough” money saved to live the life they want in retirement.

Having authored a piece just last spring on retirement savings in the Financial Analysts Journal titled “Hard Choices: Where Are We?,” here's what Charley had to say:

“‘Enough’ has long been defined to suit the conclusion of advocate. As Harry S. Truman explained, ‘It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.’”

Charley suggests we carefully examine that base data behind the conclusions of Biggs and Schieber, who point to a sophisticated computer model that showed, in 2012, the income of the median 67-year-old exceeded his career-average earnings, adjusted for inflation.

Ellis frames it this way: 'My average lifetime age is 37, but I am 74. My lifetime average earnings peak came at 45, but my peak responsibilities and peak pay (adjusted for inflation) came almost 20 years later. I'm OK with retirement income at 70% or 80% of peak, but not 70-80% of my pay at 45 which would be (inflation adjusted) only 40-50% of my base rate.'

The retirement savings crisis is real. Despite what Biggs and Schieber might say. “Most Americans simply will not be able to provide for their own future or their family’s future,” writes BlackRock’s Novick, “The lack of financial preparedness is evident across the United States.”

What makes the Biggs-Schieber conclusions so dangerous is that they undermine the advocacy effort required to ensure that policy solutions are put into place to keep this train wreck in slow motion from degrading the future quality of life for millions of individuals.

John G. Taft is CEO of RBC Wealth Management - U.S., and author of Stewardship: Lessons Learned from the Lost Culture of Wall Street (Wiley, 2012). RBC Wealth Management-U.S. is a division of RBC Capital Markets, LLC, a member of NYSE/FINRA/SIPC.

Photo: American Advisors Group / Flickr

Gregory Barton, MBA-CMA Gregory Barton, MBA-CMA Business Development and Optimization Although I agree that a crisis looms, I disagree that any government lead solution is the answers. I don't see a quick fix here but it continues to perplex me how may high school grads have no idea what the word mortgage is. The point I am making is that retirement planning needs to be a cognitive choice, like stopping at the drive-thru window, ordering a pizza or going on a vacation. The problem is that at no point during their formative years do kids or teenagers ever get educated on budgeting, household finances or retirement planning. Instead, we rely on highly paid financial planners to tell North Americans in their 50's that they are in deep trouble. I think we continue to close the barn doors after the proverbial horses are gone! Unlike(2)Reply2 months ago William Billeaud, MBA

Margaret Paddock Margaret Paddock Ciati Notary, LLC Too many believe that a necessary expense is the expensive technology they don't need. They could probably save $200+ a month by dumping the expensive phone/plans and the big pay TV programs alone. They are not a necessity. LikeReply2 months ago

Greg Jones. MA. Greg Jones. MA. 2nd Retired Founder and Managing Principal of Altavista Wealth Management, Inc. Sorry David Owen, not Scott spelled out Australia's compulsory plan, which I Iike. So few Americans make good personal financial choices regarding something that is inevitable (if one is lucky) : old age. LikeReply2 months ago

Greg Jones. MA. Greg Jones. MA. 2nd Retired Founder and Managing Principal of Altavista Wealth Management, Inc. Fair enough, Jarrod. There is a lot of money in banks waiting to hit the economy. Some inflation will result. The American economy is the most diverse and strongest in the world. We have that and many personal choices to make, unlike so many others, worldwide, don't you think? Choose well! LikeReply2 months ago

Jarrod Goldberg Jarrod Goldberg Internet Sales Manager Joe Myers Ford. A Berkshire Hathaway Certified Dealership With the Fed printing fake money and artificially pumping $85Million a month in to the stock market, who really think that your retirement isn't a pipe dream? Its all fixin to go in the sh*tter real soon! Like(1)Reply2 months ago Ron Biederman

Tyler Thompson Tyler Thompson Actively seeking quantitative analyst and statistical modeling positions Most of my family has little retirement. I take it as a warning sign. Starting a life and a career has not made it easy to invest in my retirement. I have made significant contributions to my 401k. Voluntary investment is where my generation including myself seem to fall short. I am exited work in Finance constantly educate myself on savings, investment, and retirement. Investing early and investing strong will provide for my retirement. LikeReply2 months ago

Greg Jones. MA. Greg Jones. MA. 2nd Retired Founder and Managing Principal of Altavista Wealth Management, Inc. I really like the Australian Plan Scott. Most people just don't save enough voluntarily. LikeReply2 months ago

Greg Jones. MA. Greg Jones. MA. 2nd Retired Founder and Managing Principal of Altavista Wealth Management, Inc. You will be fine, Kerem. You can't outlive defined benefit plans. The political risks you mention are possible but not probable. You are the expert here. You have no debt and multiple sources of income, valuable debt-free real estate, which could double in value over time. Your wife's K Plan could double, even triple, if max-funded and well invested. Your retirement should be more about 'expenses' than income. Most retirees face an average of about $200K in medical expenses but you should not have to pay much out-of-pocket. Even price inflation shouldn't shouldn't be much a problem. You own real estate, which did well in the 1980s. Good work! LikeReply2 months ago

Kerem Oner Kerem Oner 2nd Contributor at American Patriot; OurCivics; American Thinker; LinkedIn The article neglects to mention the millions of workers who depend on defined benefit pension plans. I am one of them. My local government pension is supposed to pay me 50% of my retiring base pay after 30 years of service, which I am nearing. Social security is supposed to pay me equivalent of another 35% if I wait till age 70 1/2. Then I have my 457 plan that, barring an ill-timed market crash, will provide another 10-15% of my current pay. That totals just about 100% of my retiring base pay in income. My wife is not as lucky in that she just has a 401 plan that has about 150K in it at the moment. Combined with a paid-off home worth just under a million, I should be ok, right? Not bad some might say. Well, I rely on pension plans for 85% of my retirement income. Will my state pension plan still be afloat? Will social security still exist or will it pay out what they promised? Those are questions with no definite answers. If this nation does not wake up soon and become financially responsible, I am afraid there will be widespread misery that will make the Great Depression look like the roaring 20s. LikeReply2 months ago

Benjamin King Benjamin King Staff Accountant at AJ CPA's, PLLC This is a good article, however the negative savings rate is something that is not new. This has been going on for years. Is this a keeping up with MTV Cribs generation? Is this a problem of not teaching financial management in early education? Is this an issue regarding lack of personal responsibility? The ultimate issue to me is one of personal responsibility. Thinking number one it can't happen to me. Number two I have plenty of time to catch up. And number three I still have to buy my new car, my new home, go on vacation, look as good or better than those around me! People have forgotten how to live well within their means! This requires sacrifice and at times a bit of short term pain. Instead of pulling out statistics, perhaps we should have an honest conversation with potential clients about what the underlying issues really are. Like(1)Reply2 months ago Scott Elliott

Rob McChesney Rob McChesney Providence Medical Group Outstanding article... This is an issue that weighs heavy on me as we implement new workflow/efficiencies in our ambulatory outpatient clinics. I along withy colleagues are trying to anticipate how our patient population landscape 10 years from now will be able to afford various services. Thank you! LikeReply2 months ago

Rolf Meier Rolf Meier System Architect at Xilinx Thank goodness that RBC Wealth Management can solve this for us. LikeReply2 months ago

Sue Hickman Sue Hickman Business Development Manager at Forever Living Natural Aloe Vera and Beehive products Retirement can be a very scary place but these days there are lots of great Network Marketing Companies out there who will teach you how to build the income you need without risk to your collateral. Don't be scared do you research and take a look at the good ones. Retirement can actually be more profitable than your original career! LikeReply2 months ago

Эмиль Джафаров Эмиль Джафаров ПР ....policies is a lie. This is true! Like(1)Reply2 months ago Abdul Salim Sulemani

Brian M. Fraley Brian M. Fraley Manager at Fraley AEC Solutions, LLC Very true. The simple fact that the pendulum swung from a pension system that prepared folks for retirement regardless of their personal saving and spending habits to a voluntary contribution system like the 401K is critical. Growing pains are natural. LikeReply2 months ago

Scott Elliott Scott Elliott After 36 years in Civil and Mining Contracting I'm done. As Maxwell Smart would say ... 'and loving it' I agree people in their 50's who've only accumulated a small amount are going to struggle and will end up on some form of welfare and will be confined to subsistence living. I retired last year at 58. For younger readers this is what I did ... I started saving/investing as soon as I finished university (Civil Engineer) and stuck to a plan of spending less than I earned and not being conned into increasing my spending too much as my salary increased. I lived in a good quality but modest house in a normal suburb. By 40 I was debt free owning both my house plus a small townhouse/villa that was rented out. We drove normal motor cars always purchased second hand with cash. I invested in a good set of tools and became a very competent DIY person looking after the cars, motorcycles and the house. I've never paid for a repair (other than parts) for any of my cars or motorcycles and have always serviced them myself. By the time I was 55 I still had no debt but had accumulated enough in managed funds and stocks that the income was more than enough to live on. I was earning a lot of money from late 40's as there was a shortage of Engineers. But I stayed in the same house, drove the same ordinary cars and kept stashing the cash. My wife and I now have a substantial my wealth portfolio and we started at 21 years of age with zilch. We've had no windfalls like inheritances. From my observation the biggest mistake people make is not having the emotional strength to ignore the marketing messages to spend your money on big ticket wealth displays to show how successful you are. They confuse expensive material goods with wealth. You don't build wealth buying expensive depreciating material items because you can afford the monthly payments. They also overspend on housing. You build wealth by spending money on income producing appreciating assets. I bought a near new demonstrator $100,000 Mercedes with cash two years before I retired as I was at the point where I could afford to have a nicer car without it having a negative impact on my portfolio. I've annoyed the hell out of the dealer as I do all my own servicing. He said I was the only customer who did. I took it as a compliment. I sold our suburban house and bought a quality townhouse very close to the beach ... but it's not a huge wealth display ... it's just a nice well located townhouse in a nice suburb. In Australia the financial planning industry misinform the public with such statements as you need enough accumulated to pay 75% of your final salary for at least 30 years. Your spending reduces as you get older. If you retire in your late 50's you'll want more in the first 10 years but then your outgoings should reduce. All the retired gents I speak to say by the time they got to early 70's they wanted long haul international flights like a 'hole in the head'. Life is much simpler for them now and they spend little money. I live very well on far less than 75% of my final salary. I expect by the time I'm 75 I'll be spending less than that and by 85 less again. LikeReply2 months ago

Andre van der Westhuizen Andre van der Westhuizen 2nd Digital channels specialist It is no different in the rest of the world. We have been living the illusion that giving your money to someone else (broker, investments company etc) would make you rich. Anyone with half a brain can use a Excel sheet and calculate the outcome. Instead of investing your money via another person, start your own venture. Working for 40 years at any level, paying pension and policies is a lie. Only to enrich the broker and company, never the fool that is paying the monies. Even in rural Africa, the uneducated members of a tribe will tell you that you cannot give your cattle to someone else and believe that you are going to become rich. Besides who in the first world can be guaranteed to be employed for every month of the 40 year job career. Rural Africa knows that they need to increase the cattle numbers every year to stay alive. Why can the PhD employees not comprehend this. You need to run your own venture, tend to your own cattle. Like(1)Reply(1)2 months ago Scott Elliott

John C. Shuey John C. Shuey Fixer. Polymath. It is now difficult to reliably get great returns by any means. The best course is to assiduously live below your means - and pay special attention to big ticket purchases like cars, homes and college. Especially pay attention to moving from house to house; the transactional costs are high. And college: half who enter fail to monetize the experience. In general, pay attention to commitments: divorce is a killer. And pay attention to health and fitness; it takes energy to succeed in life. Like(2)2 months ago Scott Elliott and Andre van der Westhuizen

John C. Shuey John C. Shuey Fixer. Polymath. Retirement, even for the privileged top quintile (they have nearly all the country's wealth), is all about cash flow because, unless you die prematurely, that is what you want to pay your bills to avoid losing ground financially. At its threshold, even the top one percent will be challenged to live off investments while keeping their $2.4M principle intact. Of course, cash flow comes from interest earned, rental income, royalties, dividends, annuities, pensions and Social Security. About 20% of current retirees have pensions, though many are quite minimal. And nearly everyone gets SS. For a couple, however, SS, all by its lonesome, makes a valuable contribution, especially if they wait until seventy to collect, even though they'll likely retire (per se) prior to that. In the top quintile it typically amounts to something like $75,000 per couple per year. So...the bad news is that you probably can't save enough to live entirely off savings. The good news is that SS is probably more lucrative than you think. Just avoid debt like the plague. Like(1)Reply2 months ago Scott Elliott

Meredith Poor Meredith Poor Software Economy Evangelist, Systems Developer 'Financial Planner' is a non-sequitur - This is pretty much the financial advice equivalent of shamans. While I haven't used the services of one, I have worked with (in the same office, or the same business) with people in the business that were (or are) complete idiots. (2) There are people that know what they're doing, but I couldn't afford their fees. They would make more per year than the sum of all my assets. (3) Depending on what one believes or reads, productivity grows at somewhere between 1.6% and 3.1% per year. At 3% per year, it doubles every 25 years. This makes certain social costs bearable that would otherwise trigger riots. (4) When 'Financial Planners' write blog posts, the emphasis is on fear. This is a reliable marketing ploy, whether justified or not. No doubt certain elements are correct, as far as they go. However, forcing savings of 10% per paid worker per year would trigger a recession in the US, as total consumption declined by the amount people were forced to 'park' in savings. (5) Those that aren't saving are going to end up on government support. They will join millions of others that are or were that way as children or indigent parents of indigent children. Some people will have to work beyond age 65, or even up until they're on their deathbed. 'You can't rely on this' - true enough, but one can't 'rely' on savings either. Most people will have to earn their way home. LikeReply2 months ago

Brian Spohn Brian Spohn company owner at misterfixitcompanyllc Hey man my company makes money I want to evpand in a big way. LikeReply2 months ago