TIME Retirement

Americans Are Totally Unprepared for This Shock

Sad piggy bank
Simon Critchley—Ikon Images/Getty Images

Never mind saving for retirement: Americans today face the bleak prospect of poverty in their golden years because they have no idea how much nursing homes cost and they wildly underestimate how much they’ll need.

In a new survey by MoneyRates.com, 40% of respondents say they’ve set aside nothing — zilch — towards paying for the care they’ll most likely need in their final years.

“Over two-thirds of individuals who reach age 65 will need long-term care services during their lifetime,” the Centers for Disease Control and Prevention warns.

Two-thirds of survey respondents have less than $75,000 saved. More than half think $75,000 is more than they’ll need for a year in a nursing home, but they could be in for a rude awakening: The average cost for a semi-private room in a nursing home is more than $81,000 a year, and that can soar to nearly $142,000 in pricey locations like New York City.

“It’s scary how quickly nursing care can run through your savings,” says Richard Barrington, senior financial analyst for MoneyRates.com. Barrington says even people who think they’re being diligent about saving for their retirement years can be led astray by the assumption that they’ll be able to live on less money after they exit the workforce.

“You may have a fair amount of discretion in the early years of your retirement, but then your financial needs may accelerate sharply,” he says. “People need to plan their savings and conserve their resources accordingly.”

A new brief from Boston College’s Center for Retirement Research illustrates what happens when people fail to plan for this possibility. It finds that even high-income retirees run out of money and need to use Medicaid to cover nursing home care.

“Medicaid… serves not just the poor, but also relatively well- off retirees impoverished by costly medical expenses,” the brief says, an outcome that has serious implications not just for these people, but for their heirs.

The eligibility rules for Medicaid are strict, with a cap of only $2,000 on what are termed “countable assets” and a five-year lookback period that essentially forces people to burn through the wealth they’ve accumulated. The government says about half of people who enter nursing homes start off paying for it themselves, but many of them spend down their assets — leaving little or nothing for their heirs — and end up on Medicaid.

The Boston College researchers looked at single seniors by income group as they aged and tracked who was covered by Medicaid. While Medicare covers all Americans once they hit the age of 65, the coverage doesn’t cover long-term care like nursing homes. For people without enough savings or who didn’t plan ahead and take out a long-term care insurance policy, the high cost of nursing homes can force even well-off seniors into poverty, at which point they’re eligible for Medicaid, which does cover nursing home care.

Although the percentage of high-income elderly who get Medicaid assistance starts out at zero when they’re 60 years old, it climbs steadily as they age, and around 20% of this population needs and qualifies for Medicaid by the time they hit their late 90s. “Higher income retirees… tend to live longer and face higher medical needs in very old age, which can result in them ending up on Medicaid,” the brief says.

Granted, many don’t live that long, but Americans are experiencing longer retirements and life spans. The CDC says the number of people 85 and older will rise from about 6 million in 2015 to almost 18 million by 2050.

“Medicaid is a safety net and it’s great that it’s there, but… you have to understand it’s likely to limit your options,” Barrington says. “If you want to leave behind any kind of legacy to your heirs or to charity, if you end up going on Medicaid, you can essentially forget about it.
A 2012 study by the Employee Benefit Research Institute found that people who lived in a nursing home for six months or more had median household wealth of only about $5,500. “For nursing home entrants, median housing wealth falls to zero within six years after the initial nursing home entry,” the study says.

“That safety net does come with strings attached,” Barrington cautions. “It’s going to sharply limit what you’re able to pass on.”

MONEY Kids and Money

This is What Sting Should Have Done for His Kids

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Musician Sting performs during the 44th Annual Songwriters Hall of Fame ceremony in New York June 13, 2013. Carlo Allegri—Reuters

Financial Planner Kevin McKinley argues that there are ways to give your children money without having to worry about them becoming trust-fund brats.

Recently rock legend Sting made headlines when he declared that his six children would be receiving little to none of his estimated $300 million fortune.

He joked that he intended to spend all of his money before he died. But on a more serious note, he explained that he wanted his kids to develop a work ethic, and not let the wealth become “albatrosses around their necks.”

His motives are admirable, and he’s certainly within his rights to use his money however he pleases. But as a financial planner and a dad, I’d argue that there is a lot of room between over-indulgence and complete denial. And in fact, used the right way, your wealth can help motivate your child.

Here are three ways you can sensibly use a relatively small amount of your own money—during your lifetime—to encourage your kid’s productivity and self-reliance, without spoiling him rotten.

1. Save something for his college

You don’t need to put every dollar you have in to a college savings account, nor do you need to pay the full cost of some high-priced private school.

But setting a little aside sets an example of your commitment to your child’s education. It also can ensure that she doesn’t have to choose between taking on a six-figure debt load, and not going to college at all.

Let’s say the parents of a recent high school graduate started saving just $50 per month at her birth, and it returned a 6% hypothetical annual rate. By now they would have over $19,000—enough to pay tuition, room, and board for a year at a typical in-state four-year university, according to the College Board.

The remaining years can then be paid for by some combination of parent earnings, a relatively manageable amount of student loans, and the student’s part-time job.

2. Jumpstart retirement savings

Speaking of jobs, once your kid earns his first paycheck you have another chance to use a little money to teach a valuable lesson.

Open a Roth IRA on his behalf by April 15th of the year after he gets his first job. He’s eligible to deposit the lesser of his earnings, or $5,500.

Kudos to you if you can get him to contribute his own money. But if you can’t get a teenager to understand the importance of retirement—I mean, let’s be realistic—you can instead make the contribution out of your own pocket. Or offer to match an amount he puts in, which you can explain to him is the easiest way to double his money. (This is also a good way to set up his understanding of an employer retirement match down the road.)

One way or the other, saving a little now could mean a lot down the road. A $5,000 deposit today into a 16 year-old’s Roth IRA earning the aforementioned 6% annually would be worth almost $100,000 by the time he turns 66.

And if the initial gesture inspires him to deposit $5,000 of his own money into the Roth IRA every year for those fifty years, the account could be worth a cool $1.5 million by the time he hits 66.

3. Help with the house

Hopefully your child eventually becomes an adult in both age and responsibility. That might be the time she wants to buy her first home.

The National Association of Realtors says the median home price in the U.S. as of May of 2014 is about $214,000.

If your child’s (and/or her spouse’s) annual income totals around $60,000, she should be able to qualify for a 30-year 4% mortgage to purchase a home in that price range, leaving her with a monthly mortgage payment of about $1,300. But she may still need to overcome the biggest obstacle to the purchase of a first home: the down payment.

Even the savviest young adult might have a hard time saving up the $42,000 needed to make a 20% down payment on that average purchase price.

Helping her meet that down payment requirement will not only get her the satisfaction of home ownership, but it will help her build equity in something with her own money. And it might mean you have a place to stay if, like Sting, you end up spending all of your money before your time is up.

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Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

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Yes, You Can Skip a Faraway Wedding

MONEY Investing

How Harvard and Yale’s ‘Smart’ Money Missed the Bull Market

Some influential investors have been on the sidelines for much of this surprising bull market.

The next time you want to give up on stocks for the long run consider this: Some of the world’s biggest investors did just that and have all but missed this bull market, proving again that the smart money isn’t always so smart and that trying to time the stock market is a fool’s game.

When the things looked bleakest in March 2009, the stock market began a torrid run that has carried into this year. That’s the way the market works. Gains come when you least expect them. You have to be there through thick and thin to consistently reap the benefits. But even big investors (or should I say especially big investors?) get scared and run.

So while the typical large stock has nearly tripled from the bottom, managers of the massive endowments at Harvard, Yale, and Stanford along with legions of corporate pension managers at places like GM and Citigroup were not there to collect. They were too busy sitting in bonds and other “safe” securities, which have woefully lagged the S&P 500’s five-year gain of 187%.

The Harvard endowment, the world’s largest with assets of $33 billion, missed the mark by the widest margin of the big universities. The stock market saw its steepest climb the past three years, a period when Harvard’s fund posted an average annual total return of 10.5%—well behind the 18.5% for the S&P 500. Yale’s $21 billion endowment returned 12.8%; Stanford’s $22 billion fund returned 11.5%. Harvard Management’s CEO recently said she would step down.

How did this happen? Well, the average college endowment has just 16% of its investment portfolio in U.S. stocks—half the exposure they had a decade ago. In the years following the Internet bust and then the financial crisis, managers steadily shifted assets to alternative investments like hedge funds, venture capital investments, and private equity. Corporate pension managers have done much the same, cutting their exposure to stocks, on average, by about a third.

Alternative investments have performed fairly well over the past decade, even outperforming the S&P 500 over that long period including the devastating collapse of 2008-2009. But there is no denying that the smart money was playing it too safe when the economy started showing signs of a rebound. Pension managers missed out on the deep value that had been created in the market.

The lesson is clear enough for individuals, who have limited low-cost access to things like private equity and venture capital anyway. Staying the course over the long pull is the best way to reach your financial dreams. Just three years after one of the worst market slides in history the average 401(k) balance had been totally restored, in part owing to the market’s recovery.

And you can give pension managers an assist. Their reluctance to bet on stocks near the bottom left prices depressed longer and allowed individuals putting a few hundred dollars into their 401(k) every month more time to accumulate stocks at the lower prices. That’s not great for those counting on a pension that, like so many, remains underfunded. It’s also not great for teacher salaries and student scholarships at major universities where endowments may fund a quarter of operating expenses. But don’t worry about all that. Just stick to your investing regimen, don’t panic, and know that you are the smart money more often than not.

MONEY Ask the Expert

Should I Be More Hands On With My 401(k)?

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Robert A. Di Ieso, Jr.

Q: I am in my mid-30s and I am hands off with my 401(k). Should I be more active with the funds my 401(k) is plugged into? – William E. Collier

A: When it comes to 401(k) plans, inertia tends to rule—many people never revisit their initial investment choices after enrolling. It’s important to keep tabs on your plan and to make a few tweaks occasionally. But whether you should be a lot more active depends on how comfortable you are managing your own investments.

Most 401(k)s offer low-cost core stock and bond funds, including index options. If you are familiar with the basic rules of asset allocation, you can easily build a diversified, inexpensive portfolio on your own. But recent research makes a good case that getting some professional help with your portfolio can boost returns.

Pros may not outsmart the market, but they can often save your from your own worst instincts—taking too much or too little risk, or changing your investments too frequently. As a recent study by consultants AonHewitt and advice provider Financial Engines found, investors who followed their plan’s financial guidance earned median annual returns that were 3.3 percentage points higher than do-it-yourselfers, net of fees. The study analyzed the returns between 2006 and 2012 for 723,000 plan participants, including investors in target-date funds and managed accounts, those using the plan’s online tools, as well as do-it-yourselfers.

A three percentage point gap is substantial. A do-it-yourselfer who invested $10,000 at age 45 would have $32,800 by age 65; by contrast, the average 401(k) saver using professional advice would have $58,700 at age 65, or 79% more, the study found.

Another analysis by investment firm Vanguard found a smaller difference in returns for those who got help vs. those who didn’t. Target-date investors earned median annual returns of 15.3% vs. 14% for those managing on their own. The do-it-youselfers also had a wide range of outcomes, with the 25% earning median annual returns of less than 9%.

These days more plans are providing guidance in the form of online tools and target date funds: 72% of 401(k) plans offer target-date funds, up from 57% in 2006, according to the Investment Company Institute. The Plan Sponsor Council of America found that 41.4% offered some kind of investment advice in 2013, up from 35.2% the previous year.

Taking advantage of this help can be a smart move. But if you opt for a target-date fund, be sure that you use it correctly—as your only investment. Adding other funds will throw off what’s designed to be an ideal, all-in-one asset mix. Unfortunately, nearly two-thirds of target-date fund users put only some of their money in one, while spreading the rest among other investments. That move may lower your median annual returns by 2.62 percentage points, the study found, compared with investors who put all their money in a single target-date fund.

If you decide to go it alone, make sure to build your own ideal portfolio mix—try Bankrate’s asset allocation tool. To minimize risk, rebalance once a year to prevent any one allocation from getting too far out of whack. As you near retirement, remember to ratchet down the risk level in your portfolio by shifting to more conservative investments, such as bonds and cash.

Make these few moves, and you won’t get left behind by being hands on.

TIME Retirement

Boomers: Prepare for Your Second Act

Life is long. Yours may be overdue for an overhaul

My friend Meg was successfully treated for thyroid cancer in her 30s, but at every annual checkup afterward she braced for bad news. At lunch after a recent visit with her doctor, she was wearing such a worried expression that we were prepared for the worst. Here’s what her doctor had said: “Meg, I think you’ve dodged a bullet. I don’t think that cancer is coming back.”

Good news! And yet the look on her face was not joy or even relief. Meg had been living year to year. Now, facing the prospect that she might go on living a long time, she felt completely unprepared. As she said, “What am I going to do for 40 years?”

It’s the question of the age–and the question of our age. My generation is the first to get a heads-up that many of us will be living longer than we ever imagined, many of us working into our 70s and living into our 90s. But what are we going to do? As Laura Carstensen, director of the Stanford Center on Longevity, notes, “The culture hasn’t had time to catch up. The enormity of this hasn’t hit people.”

Our midlives are lasting longer. What does midlife mean now? It used to be the beginning of a long glide into retirement, which many of us still look forward to. Unlike previous generations, who retired from something, my generation hopes to retire to something. Retirement is a word with new meanings–no longer a door marked EXIT. Think instead of a door that swings on a hinge, moving us forward to something new–though many if not most of us lack a ready answer for what that something is. Still, research has shown that people 50 and older are more active and vital in their outlook than 50-somethings were only 10 years ago! We share an inchoate feeling that there is something more.

Marc Freedman of Encore.org, which helps people pursue second acts for the greater good, says we’ve been blessed with a “bonus decade or two or three.” We still have options. And the Gen X-ers are not far behind–they started turning 50 in 2014.

The timing isn’t bad. A few years ago researchers discovered that, around the age of 40, people begin to experience a diminished sense of well-being. They were surprised to find this in men and women, rich and poor, all over the world. But the bigger surprise was what came next: around the age of 50, feelings of well-being begin to rise again–and keep on rising, well into the 70s. In the 21st century, 50 is the beginning of a new and aspirational time of life.

We have all known inspiring individuals who have defied the stereotypes of aging to lead long, creative and productive lives, but until now that was perceived as the exception. You may be surprised to know that people over 55 represent the largest group of owners of new business startups. At a time when our own parents and grandparents expected to wind things down, 50 is now the era of the second wind.

That doesn’t mean it is going to be easy. Stanford’s Carstensen notes that with our new vitality come some pretty big questions. “Those of us living today have been handed a remarkable gift with no strings attached–an extra 30 years of life for the average person,” she says. “Now that gift is forcing us to answer a uniquely 21st century question: What are we going to do with our supersized lives?”

I don’t fashion myself an authority, but I have spent the past few years of my life traveling the nation talking to people who have reinvented themselves. Here are some common misconceptions you may have about reinvention: that you have to get it right the first time; that there is some more authentic “you” waiting to be revealed; that reinvention is a total makeover. Or that everyone has a passion to follow.

Based on my own experience, I’d endorse a couple of counterintuitive ideas instead: Trial and error are keys to growth and self-knowledge. Reinvention may require being reintroduced to yourself. Self-discovery may not be a requirement for reinvention, but it may be the payoff.

It’s been my personal observation that if there’s a secret to reinvention, it’s that there isn’t one, or rather, there isn’t only one. There are as many ways to do it as there are experts eager to guide us. As Bertolt Brecht put it, “The shortest line between two points can be a crooked line.”

For the lucky few, here’s a chance to reach toward a long-nurtured dream. For many, the way forward may feel like groping in the dark, as it did for me. Frankly, we are all making it up as we go along. But how reassuring to know we’re all in this together.

Pauley’s latest book, from which this article is adapted, is Your Life Calling: Reimagining the Rest of Your Life (Simon & Schuster)

TIME Retirement

2030: The Year Retirement Ends

The real debt-and-deficit crisis facing our country isn’t national—it’s personal. A look at the coming retirement apocalypse and what we have to do to avoid it

The retirement scenario everyone wants to avoid arrives in 2030. That’s when the largest demographic group in U.S. history, the baby boomers, will have nearly depleted the Social Security trust fund. It’s also when older Generation X-ers will begin moving out of work and into their golden years.

But these won’t be the years of leisure that recent generations have known. Consider a typical 2030 retiree–an educated Gen X woman, around 65, who has worked all her life at small and midsize companies. Those firms have created most of the new jobs in the economy for the past 50 years, but only 15% of them offer formal retirement plans. Our retiree has put away savings here and there, but she’s also part of the middle class, which took the biggest wealth hit during the financial crisis of 2008. That–along with the fact that average real wages have been virtually flat for three decades, even as living costs have risen–means she has minimal savings, even less than the $42,000 that today’s average retiree leaves work with.

More than half her retirement income comes from Social Security. When you factor in health care spending, she’ll be living on only about 41% of the average national wage. Despite her best efforts to work and save, our Gen X retiree will have trouble maintaining her standard of living. She won’t be alone: the Center for Retirement Research at Boston College estimates that 50% of American retirees will be in the same boat.

In all likelihood, then, she won’t actually be retired. Like many of her peers, our Gen X-er finds herself needing a part-time job; she shares her home and many living expenses with her son, a millennial who isn’t doing so well himself. More members of his generation live with Mom and Dad than any generation before, according to the Pew Research Center, in part because they came of age in the post-financial-crisis era, when wages were stagnant and unemployment high. (If you enter the workplace during such cycles, your income never catches up.) As he struggles to pay down student loans and save enough money to move out, there’s very little left over–which means he’s on course for an even less secure retirement than his mother.

Boomers scrambling to get by on a minimal income. Gen X-ers who can’t afford to stop working. Millennials staring at a bleak financial future. This is the retirement apocalypse coming at us fast–unless we do something about it now. As with other big, slow-moving crises (climate change, health care, the quality of education), it’s difficult to create a sense of urgency over retirement security. But in the past few years, the financial meltdown and its aftermath have thrown the problem into sharper relief. Now, in a retirement landscape that has witnessed few big innovations since the Reagan Administration and the rise of the 401(k) account, we’re suddenly seeing a range of new ideas.

Controversially, many of the new approaches call for a greater role for government after three decades of pushing responsibility for retirement onto individuals. They include everything from President Obama’s MyRA plan, which would let some individuals save in a fund administered by the U.S. Treasury, to a spate of state-run programs. The most intriguing–and hotly debated–approach is taking shape in California, where state senator Kevin de León has pushed through a bill that aims to guarantee every Californian working in the private sector a living wage in retirement, a plan some experts say could become a new model for the nation.

Advocates say the government role will help recruit more people to save and can keep costs low with efficiencies of scale derived from all those participants–much as some big public-employee plans do. But the reforms are being challenged by everyone from small-government conservatives, alarmed by a growing public role, to financial-services companies, which fear that government-run plans will put money into simple index funds rather than the managed funds that generate more lucrative fees for the industry.

Regardless of the eventual solution, few dispute that we’re on a dire course at present. Experts estimate that half of Americans are at risk of becoming economically insecure in retirement. Our system is in desperate need of a fix. “We’re facing a tsunami,” says Senator Tom Harkin, a Democrat from Iowa who has proposed his own program. “And we’ve got to deal with it–now.”

GROUND ZERO

If there’s one place in America that best captures the complex mix of economic, social and demographic trends that play into the looming retirement crisis, it’s California. Like many other national stories, this one bubbled up early in the Golden State. Long before Detroit went bust, the state was in the news for its public-pension troubles, including massive bankruptcies in Stockton, Vallejo and San Bernardino. California is also emblematic of all the worrisome trends: it has more retirees, young people without benefits, poor people, immigrants and small and midsize businesses than most states. In other words, it checks all the boxes of groups most at risk of an insecure retirement.

Yet the Golden State is also coming up with some of the most forward-thinking ideas. De León’s approach, called the California Secure Choice Retirement Savings Program (CSC), was signed into law in 2012 by Governor Jerry Brown. It aims to combine the best of old-style defined-benefit plans (traditional pensions that guarantee workers a set level of yearly income in retirement) with the flexibility and mobility of a 401(k). CSC will cover workers in California who don’t currently have access to formal retirement savings via their work. “I’m a big fan,” says Monique Morrissey, an economist with the liberal Economic Policy Institute who recently testified before Congress on retirement security. “It’s probably the farthest along of all the retirement-reform ideas in terms of practical implementation.”

Details of the plan, which will launch in early 2016, are now being hashed out in consultation with a variety of industry and academic experts. It’s likely that CSC will use behavioral nudges to get as many eligible people as possible to participate–for instance, by making enrollment automatic unless a worker opts out, rather than requiring a sign-up to opt in.

Participants in CSC would sock away at least 3% of their income, most likely in a conservative index fund, in which money is invested in all the stocks listed in a specified index. For instance, in an S&P 500 fund, the pooled money is invested in all 500 stocks in that index. Index funds are considered a simple way to ensure that investors see the same return as the overall stock market–and they’re cheaper too, since index funds don’t employ stock-picking wizards and charge the related fees.

The possibility of more workers putting savings into such low-cost funds may help explain why CSC is getting resistance from the Securities Industry and Financial Markets Association (SIFMA), a trade group for securities firms and asset managers. But a version of this plan has already been enacted for nonprofit workers in Massachusetts, and plans similar to CSC are being discussed by governors and legislatures in states including New York, Illinois, Oregon, Washington, Connecticut, Maryland, Minnesota and Arizona. If successful, CSC and plans like it would put the government deeper in the business of guaranteeing retirement security. They would also underscore the fact that a 100% private, do-it-yourself system isn’t working–at least for many Americans.

De León, the force behind CSC, was raised by his Mexican mother, who died of cancer at 54, and his aunt. Both women worked as maids in various affluent California homes. De León says he became focused on retirement security last year when his aunt, who is 74, fell ill and couldn’t work.

“She was still cleaning homes in La Jolla when she had a stroke. She had no IRA, no 401(k), nothing. She had been working essentially freelance,” says de León. “I became her 401(k). I had to give her money because her Social Security didn’t suffice for her basic expenses, like housing, food, medication, a bus pass.”

De León’s district, in downtown Los Angeles, is home to many people in a similar fix. A melting pot that includes the city’s Chinatown, Koreatown, Little Armenia and other ethnic enclaves, it’s full of small entrepreneurs, immigrants and freelancers who work not at big blue chips but in the less secure firms and “gig economy” that’s increasingly becoming the norm in America.

STILL WORKING

Paula Dromi is one of those workers. A 75-year-old social worker, Dromi lives in a small three-bedroom bungalow near de León’s office in downtown L.A. with one of her two grown sons (who moved back to save money after a period of unemployment) as well as a friend. Both housemates help Dromi pay major living expenses. Her Social Security plus the money she makes working as a part-time freelance therapist amounts to about $1,700 a month. But her home insurance, property taxes and mortgage alone are nearly $1,500. Both she and her journalist husband (who died in 2000) saved for retirement, but years of co-payments on medical bills for his brain illness depleted both his $35,000 IRA and their $30,000 in savings.

Dromi was left with her $60,000 IRA–lower than it might have been because she changed jobs often and, like many other women, took time off to raise children–and her home, which is valued at $442,000. She could always sell the house. But if she did, she says, she’d have to move out of L.A. because of its lack of cheaper housing. Instead she has pieced together a multigenerational home and a freelance work life that she hopes she can maintain indefinitely. “I’ll be working another 20 years, assuming I can,” says Dromi.

In a way, Dromi is lucky. She has a home that she can share and is healthy enough to work, at least for the time being. But the fact that an educated professional who saved and had health insurance can end up scraping to get by in retirement underscores how fragile the system is.

That fragility is in large part due to the massive shifts in the American retirement system since 1980. That’s when the 401(k) plan was invented, by a benefits consultant working on a cash-bonus scheme for bankers, who had the idea to take advantage of an obscure provision in the tax code passed two years earlier, allowing for deferred compensation of individuals to be matched by their company.

The result was the 401(k), a savings account that lets employees contribute pretax income from their paycheck (sometimes with employers matching some or all of the amount) but, unlike the traditional pension, does not promise a specific regular payment upon retirement. Holders of 401(k)s amass a hopefully growing fund from which they can draw money when they retire.

This system is largely based on accident and anomaly–401(k)s were never meant to replace traditional pensions as a primary retirement vehicle, but they have. We’ve ended up with a bifurcated system that has the upper third of society doing better and everyone else doing worse. Statistics show that people retiring now who have been invested in 401(k)s rather than traditional defined-benefit pensions are less well off than those who came before them. That’s because 401(k)s typically work best for people who work for big companies, with salaries that allow them to put away double-digit percentages of their income, and who have either the sophistication to choose their own asset allocations well or a benefits department that offers up smart options and auto-enrolls them in the plan.

The problem is, most Americans don’t fall within that group. Only 64% of private-sector workers have any kind of formal retirement plan, and fewer than half sign up for one. What’s more, the number of people with access to plans is declining; part-time and freelance workers usually don’t qualify. With the situation becoming increasingly dire, there is a drumbeat to reform the 401(k) system. Options include making enrollment mandatory, providing state-sponsored IRAs (or even national ones like Obama’s MyRA, which is based on the highly successful, low-fee Thrift Savings Plan offered to federal workers) and cutting red tape and costs so that more small businesses could offer employees 401(k) plans.

But the efforts have been piecemeal and ineffectual. Some critics blame the financial-industry lobby. In a letter to the California treasurer late last year arguing against the CSC plan, SIFMA contended that such programs would “directly compete for business with a wide range of California financial-services firms” and that state money should be put not into creating universal retirement plans but into educating individuals “about the benefits of early and regular savings for retirement.”

De León responds that it’s asking a lot of many workers to navigate the complex investment choices in many private plans. Indeed, over time, passive index funds typically beat all but a handful of actively managed funds, and many individual workers don’t have access to the highest-performing vehicles.

SYSTEM REBOOT

That’s why many retirement scholars would like to see the entire system changed, starting with 401(k) plans themselves. Harkin’s bill, the USA Retirement Funds Act, aims to make it more difficult for people to borrow from 401(k)s. This “leakage,” when savers tap their retirement funds prematurely, is a big reason people come up short in retirement. Harkin’s proposal would also shift the standard payout from a lump sum to a steady income stream in retirement.

Some experts would also like to see the government force more workers to save. For those who have access to 401(k)s, “Congress should make automatic enrollment mandatory, and plans should invest people in low- or no-fee index funds,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. She and others also suggest establishing third-party administrators that would run the programs for groups of companies–bringing together more workers, creating better economies of scale, lowering fees and raising returns.

Governments are, of course, a possible candidate to run such programs–that’s essentially what de León is proposing to do for workers who are currently not covered by any other plan. Critics say government has a poor track record when it comes to protecting retiree savings, citing public-employee pensions in cities like Stockton, Calif. De León counters that unlike public-pension plans that promised 8% returns a year and cushy retirements, the CSC model has more modest aspirations–around 3% returns and a “livable yearly wage in retirement.”

Unfortunately, truly fixing American retirement will likely take more than even mandatory 401(k) plans and diminished expectations. Social Security reform is a subject that must be debated soon, in a real way, if we want to avoid having a generation of elderly poor. The fact that fewer than 10% of America’s elderly are currently poor largely reflects the contribution of Social Security to their income. Without it, says Pew’s Paul Taylor, author of the book The Next America, about half of people over 65 would be poor.

Beyond that, it’s probably inevitable that we’ll all be working longer. Munnell of the Center for Retirement Research points out that delaying the start of Social Security benefits from age 62 to 70 could increase monthly payouts by 76%. “Most of us are healthier and have less physically demanding jobs than our parents and grandparents,” Munnell says. “Stretching out our work lives is a sensible option.”

Changing our households to return to a once common multifamily structure, as Paula Dromi and her son have done, may be another. Taylor is hopeful that such forced communal living may actually help spark the tough political debate needed to reform entitlements and enhance retirement security while continuing to invest in our economy for the sake of the young. The portion of the population most worried about retirement are the 20- and 30-somethings who see an uncertain future as they struggle to pay off student loans and establish themselves in the work world, and perhaps lean on their parents for support. “There’s a growing sense, for all the generations, that no one has been spared and everyone is suffering to some extent,” says Taylor. “There’s also a sense that we’re all in this together–and maybe that has the potential to change this zero-sum debate.” If we’re lucky, that may help us find the way to a system in which people of all generations can retire with security and dignity.

MONEY Retirement

Eco Disaster: Lessons from Greenpeace’s Currency Bet Gone Bad

The global peace and sustainability nonprofit lost a bundle betting on currencies. Here's what you can learn from the mistake.

Superstars from Tiger Woods to Warren Buffett tell us the secret to their success is keeping it simple. So why would a donor-dependent, globally recognized nonprofit take a macro-economic flyer on which way currencies will move?

More important: What can the disastrous Greenpeace International bet on the direction of the euro tell us about how we handle our own financial matters? Greenpeace, which is quite good at promoting peace and sustainability, is really bad at macro analysis. Sometime last year the organization lost $5.2 million—more than 6% of its annual budget—when it bet wrongly against a rising euro.

This large loss came to light only this week, and it’s too soon to know its full effect. The organization says a financial pro on its staff overstepped and has been fired, and that the loss will not lead to a penny being cut from its causes. Still, it’s hard to believe that at least some donors won’t bristle and hold back donations. The consequences promise to go beyond simple embarrassment.

One lesson here is that currency speculation is a tricky business and best left to hedge fund managers like George Soros. If you must engage in currency bets alone, do so with only a small fraction of your savings and through straightforward international government bond funds. These pay interest in local currency and thus represent a foreign exchange bet. You might also consider a currency ETF from leaders CurrencyShares and WisdomTree.

The bigger lesson, though, is that it really does pay to keep things simple when investing. As Buffett writes in this year’s annual letter to shareholders:

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Complexity is all around us. Exotic mortgages sunk millions of homeowners in the Great Recession. Unimaginably arcane financial derivatives contributed to the demise of Lehman Bros. and downfall of Bear Stearns, among other investment banks, during the financial collapse. Even bankers didn’t know quite what they were doing—not unlike the hapless, rogue finance staffer making a wrong-way bet on the euro for Greenpeace.

Individuals can make things as difficult or as easy as they want when they save and invest. Annuities are especially hot right now. Many people shy away from them because they believe all of them to be complex, and many others end up in the wrong type of annuity (and many other insurance products) because so many truly are complex. Yet for most people just looking to lock up guaranteed lifetime income, the venerable immediate or deferred immediate annuity are a sound and simple option.

Likewise, you can prospect for the hottest stock funds, only to be disappointed once you plunk down your dollars and see them eaten away by lackluster returns and high expenses—or you can choose low-fee diversified stock index funds, or maybe a target-date mutual fund, sleep well, and check back in just once a year to rebalance. Why layer chance on top of investment risk? You are good at something else, not macroeconomic analysis.

Reports suggest that the wayward Greenpeace employee was not nest feathering but trying to do the right thing for the future of the organization. Still, it went bad—even for someone in finance. As with many endeavors, when it comes to money, better to do as Buffett says and just keep it simple.

TIME Retirement

The 4 Words Terrifying Americans Right Now

Photo: Travis Rathbone

This post is in partnership with The Fiscal Times. The article below was originally published on The Fiscal Times.

Americans are freaking out about their personal savings – and for good reason. A recent Gallup poll found that 59 percent of those surveyed were very or moderately worried they won’t have enough money for retirement – by far their biggest concern.

Many people once counted on a triad of support for retirement – Social Security, personal savings, and employer-sponsored pensions. Yet in the wake of the Great Recession and a long stretch of high unemployment and stagnant wages, the once-dependable foundation has been crumbling.

Related: Rubio’s Retirement Savings Solution: Work Longer

Employers have phased out generous defined benefit pension programs in favor of 401(k)s and other workplace-based retirement accounts. Personal savings have taken a dive as many people have tapped retirement savings to pay the rent or help make ends meet. And many young people seriously question whether the Social Security trust fund will be able to pay them anything by the time they retire.

The latest National Retirement Risk Index from the Center for Retirement Research (CRR) at Boston College says that more than half (53 percent) of households risk falling more than 10 percent short of the retirement income they’ll need to maintain their standard of living. More than 40 percent of retirees are also at risk of running out of money for daily needs, out-of-pocket spending on health care or long-term care, according to the Employee Benefit Research Institute (EBRI).

Even more alarming, the National Bureau of Economic Research recently concluded that nearly one-quarter of Americans could not come up with $2,000 in 30 days if necessary, and another 20 percent would have to pawn or sell possessions to do so. That would mean nearly half of all Americans are financially stressed.

“The graying of Americans, a growing retirement population, rapid changes in the private employer pension programs, projected insolvency in public pension funds, fiscal pressures at both the federal and state level – all this and more requires policymakers to renew their focus on ensuring existing programs support individuals and families in their twilight years,” said Bill Hoagland, a senior vice president of the Bipartisan Policy Center.

Related: Retirement Savings: Men and Women Do it Differently

The mounting crisis over retirement savings and investment underscores a key facet of the evolving national debate over income inequality: While many households are well prepared for retirement, only 17 percent of people in the lowest income quartile will have sufficient resources to avoid running short of money by the end of their lives, according to EBRI’s 2014 metric.

The Bipartisan Policy Center on Monday is launching a “personal savings initiative” to begin formulating a series of innovative proposals to try to increase national savings, improve income security in retirement, and guard against the potential costs of long-term care. While Congress is unlikely to take up any meaningful tax or financial services legislation before November, a new commission chaired by former senator Kent Conrad (D-ND) and former Social Security Administration official James B. Lockhart III hopes to outline an action agenda for the coming year.

The group will look for ways to beef up the defined contribution retirement system by increasing personal savings for retirement and improving the effectiveness of tax-advantaged savings vehicles, according to a sum of the initiative.

Related: Robust Stock Market Boosts Retirement Savings

The commission will also examine the impact of federal policies on private savings, the finances and operation of Social Security Disability Insurance, the interaction of Social Security with personal savings, the impact of long-term care needs on retirement security, and the role of homeownership and student debt.

The reasons for shortfalls in retirement savings are complicated, but three stand out, says the BPC:

  • A Sea Change in Workplace Retirement Plans

Over the past two decades, the workplace retirement landscape has dramatically shifted to defined contribution plans, in which a worker and in some cases the employer contribute to an account managed by the employee. These have largely replaced defined benefit plans, which specify a benefit – often a percentage of the average salary during the last few years of employment – once the worker retires.

Since 1998, the number of companies offering any sort of defined benefit plan plummeted from 71 to 30 – and an increasing number of those are hybrid plans, where workers accumulate an account balance rather than an annuity. When 401(k)s were created in 1978, they were meant to be a supplement to traditional defined benefit pensions, not a stand-alone retirement account. But over time, they have evolved to serve that purpose – although they typically provide far less in long-term benefits than the old plans.

  • Dismal Personal Savings

The reasons for the long decline in personal savings are difficult to pinpoint, but they likely include stagnant real incomes for many workers, rising standards of living and higher consumption, and a weaker dollar than in the past. The savings rate is the percentage of money that one deducts from his or her personal disposable income for retirement.

Related: The 401(k) Loan: America’s Pricey New Piggy Bank

America’s savings rate fell steadily from the early 1980s through the mid-2000s, ticking up only during or after recessions, according to a Washington Post analysis. It topped 11 percent during President Ronald Reagan’s first term. From 2005-2007, the annual rate averaged 3 percent. The savings rate essentially doubled during the Great Recession, and stayed there, averaging nearly 6 percent from 2009-2012. By early 2013, the rate had dipped to 2.6 percent, before rising again to 4 percent by mid-2014.

A Capital One ShareBuilder survey this year found that 72 percent of Americans are saving – while many more than that know they should be – and only one-fifth of them are saving 10 percent or more. On average, people are saving only 6.4 percent of their annual income, the survey found.

  • Taking the Money Out

For those with defined contribution retirement accounts, carefully managing withdrawals is part of the challenge. Many people are shocked to discover that their account balances, when they need them, are smaller than they anticipated because of cash-outs during job changes, hardship withdrawals, or expensive 401(k) loans. Moreover, those who do not use their savings to purchase lifetime annuities face the risk of outliving their savings.

Individuals without long-term care insurance face impoverishment, having to spend almost all of their financial assets and income on care before they can qualify for long-term support benefits through Medicaid, the federal-state safety net program.

Read more from The Fiscal Times:

Your Tax Dollars Pay for Walmart Execs’ Bonuses

10 Affordable Housing Markets—On the Beach!

How Hookers and Drug Dealers Could Boost US GDP

MONEY Health Care

The Retirement Decision That Could Cost You $51,000

An early retirement may be good for reducing stress but it will also shrink your nest egg.

If you’re worried that health care costs will take a big bite out of your retirement income, don’t retire early.

Couples retiring at age 65 will spend an average $220,000 on health care expenditures, according to the 2014 Retiree Health Care Cost Estimate by Fidelity Investments.

But if you leave the job before 65, you’ll face even higher costs. A couple retiring at 62 would pay $17,000 a year in insurance premiums and out-of-pocket expenses—a total of $51,000—before reaching Medicare eligibility at 65, Fidelity calculated. That would push your total retirement health care costs to $271,000.

“If you have to buy health insurance when you’re older and you’re not on Medicare yet, it’s going to be a lot more expensive,” says Carolyn McClanahan, a doctor and a certified financial planner in Jacksonville, Florida. Even under the Affordable Care Act, older people spend $500 to $1,000 more a month than younger people do in premiums, she points out.

All the more reason to delay your retirement as long as you can. If you wait till age 67, you could save $10,000 a year on your medical expenses. That’s assuming you stay employed and your company pays the majority of your health care costs, which allows you to delay taking Medicare. “On average, Medicare picks up much less than the typical employer plan,” says Sunit Patel, senior vice president of Fidelity Benefits Consulting.

There is some good news in Fidelity’s latest analysis. Health care expenses have moderated in recent years, so this year’s $220,000 lifetime expense is unchanged from 2013. That slowdown is the result of reduced costs for long-term prescription drugs covered by Medicare Part D, as well as lower per-enrollee Medicare expenditures.

Still, whether you retire at 62 or 67, health care is a big-ticket item—and you need to plan for more than just the medical bills. Fidelity’s estimates don’t include the cost of paying for long-term care services, such as a home health aide or a nursing home, in the event you become disabled.

Of course, the timing of your retirement isn’t always something you can control. About half of retirees report that they left the workforce earlier than planned because of health issues, a layoff, or to care for an elderly relative, according the Employee Benefit Research Institute.

If you want to retire early, or think you’ll be forced to leave the workforce, be sure to estimate your health care costs and budget that into your retirement spending. If you’re in ill health or have a chronic condition such as diabetes, you may need to set aside more money for doctor visits and prescription drugs. And take whatever steps you can to improve and maintain your health. “If you’re in your 50s, this is the time to take good care of yourself,” says McClanahan.

TIME Retirement

Millennials Are Leading Boomers to a Smarter Retirement

In retirement jobs, boomers embrace many of the same work values as Millennials.

Most boomers couldn’t name a song by Imagine Dragons or find much use for the news on Policymic.com. But give it time. Both are popular with Millennials, and in some ways we are turning into our children.

Four decades may separate the two generations, which have had vastly different life experiences. Boomers came of age during a time when jobs were plentiful and pensions were secure. Millennials have reached adulthood amid broad underemployment and a crumbling social safety net. These would seem to suggest opposite economic views. But that isn’t necessarily the case.

Of course, the generations have differing views in many areas, and a Pew survey found extreme gaps in technology, politics, music, religion and parts of the workplace. Yes, Millennials prefer to wear flip-flops to the office and text, not talk. Yet in key ways, boomers and Millennials are, like, so similar:

  • Work/Life balance Boomers once thrived on 60-hour workweeks, getting their social life in at the water cooler, and logging the face time needed to get a promotion or more pay. Now that retirement years loom, they have embraced flexible schedules even if it means no promotion. Many boomers must keep working but they want to live a little too. Millennials have felt that way from the start, in part because they’ve had fewer career opportunities but also because many have seen parents toil away for 40 years and never get ahead. They want a different path; they want to enjoy the process because it may not end with financial dreams fulfilled. “The similarities in attitudes across generations are striking,” the global consulting firm PwC found in a 2013 study. For many boomers, work used to be their personal life. Now more than 60% in both generations agree that work interferes with their personal life.
  • Meaning Boomers have long sought a higher purpose, be it ending a war or fighting for civil rights. But their job was about getting ahead, not changing the world. Millennials link work with doing good and having a rewarding experience. That is partly how they expect to be paid—through job satisfaction. They want to work for green companies, have responsibilities that interest them, be part of a team, travel and feel like they are making a difference. Again, with retirement looming, boomers are hopping on board. Some 57% of working retirees are either volunteers or working at a job that provides a community service, or working as a way to maintain connections, according to a report from Bank of America Merrill Lynch and Age Wave, which notes that through work members of this generation “seek greater purpose, stimulation, social engagement, and fulfillment.”
  • Saving Now past 50, many boomers have begun to ramp up saving in a last-minute blitz to reach retirement security. Many won’t make it, which is the main reason that 28% in the Merrill Lynch survey work in retirement. But others are taking advantage of catch-up savings plans and setting aside more pay. The Insured Retirement Institute estimates that 80% of boomers have retirement savings; about half of them have at least $250,000. Perhaps they have taken a cue from Millennials. Eight in 10 in the younger generation say the recession convinced them they must save more now, according to the 2014 Wells Fargo Millennial Study. More than half are putting away money regularly. An almost identical share of boomers (56%) and Millennials (55%) would like to see a mandatory retirement savings policy in the U.S.

The generations may never agree on what makes a good band or where to find the most pertinent news. But we seem to be discovering common ground in areas that matter.

 

 

 

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