PrintThe Nexus Between Time and Money
By Don Kuehn
The first time my father asked me for advice on how to invest the proceeds from the sale of the family home, I gave him a few ideas and encouraged him to plan to spend everything he had. “Your time and your money should run out together,” I told him.
“Yeah,” he said, “but I only know how much money I have.”
Sadly, that’s the case for way too many older Americans. They know how much money they have, and it’s not enough to last until their time runs out. They are missing the nexus between time and money, according to a study by the Employee Benefit Research Institute (EBRI) released in January.
Part of the problem is failing to build portfolios large enough to support their retirement lifestyles. Another is misunderstanding the extent to which Social Security will replace earnings. And many people have no clue about how fast they can draw down assets from their savings to finance retirement expenses.
The people EBRI tracked were between 61 and 71 years of age when the 10-year study ended in 2002. They are the first cohort to experience firsthand the shift from traditional pension plans (defined benefit) to defined contribution plans like 401(k)s.
Understanding how that generation is doing at managing assets is central to the question of whether defined contribution plans can be expected to provide the rest of us with the comfortable life we think we have earned. The news is not good.
One-fifth of these recent retirees are headed toward disaster--likely to deplete their total wealth before dying.
According to EBRI, “Adding to the complexity of these issues is the possible creation of voluntary individual accounts … coupled with a reduction in the annuity benefits from Social Security. Depending on how Social Security recipients are allowed to withdraw dollars from these accounts, retirees could be faced with managing even more lump sum wealth--and receiving even less lifetime annuity wealth.”
Winners and losers
In general, if you are married, healthy, well educated and white, the EBRI study shows you are more likely than not to be able to maintain a basic standard of living through retirement. But single women, those in poor health and persons of color are not.
• Whites in the study had a median wealth of $230,000 in 2002, compared to African-Americans’ $48,000 and Hispanics’ $46,000.
• College graduates had a median wealth of $394,500, compared to $184,000 for those with high school diplomas.
• The median wealth of people describing themselves as being in excellent to very good health was $297,000 vs. $29,500 who said their health was poor.
“Despite some groups doing a better job than others, every group had at least some members on the right track in wealth management … and every group also had members who either had quickly lost all their wealth or were well on their way,” the EBRI report said.
One of the biggest challenges in managing your own wealth is to guard against severe downturns in the market. It isn’t hard to make money in a rising market, but plunges like we saw starting in March 2000 put stress on even the savviest investors. During the study period (1992-2002), about 30 percent of the study subjects lost 50 percent or more of their financial wealth, while more than half saw their financial wealth grow by 50 percent or more.
Even people who have traditional pension income are in danger of running out of resources because only a third receive more than $15,000 per year. The majority who get a regular pension income receive a much more modest amount.
In 1992, 40 percent of families with a retirement plan had only a defined benefit (traditional) pension. This dropped to fewer than 20 percent by 2001. On the other hand, those with only a defined contribution--401(k)-style--plan increased over the same period, from 37.5 percent to 57.7 percent.
A recent phenomenon of companies underfunding defined benefit plans, walking away from their pension obligations and offering retirees a lump-sum option rather than a lifetime annuity has increased the growth of IRAs significantly. Workers are rolling their assets out of the employers’ grasp and into their own. But it also means the investment risk involved in making those assets last for the rest of their lives has shifted from employers to workers.
There are scant data on public employees to match those for the private sector. We do know that total defined benefit (monthly pension) and defined contribution (403(b) plans) retirement assets in state and local public sector plans grew from $0.963 trillion at year-end 1992 to $1.994 trillion at the end of 2003.
During our work lives, we try to focus on asset accumulation. Then we reach a milestone birthday and there’s a sudden shift, and all of a sudden, we have to try to figure out how to spend down those assets in retirement. The fact that life expectancies are getting longer adds to the challenge.
Today, a male who reaches age 65 can expect to live another 16 years and a woman can expect to live about 19 more years, according to the Social Security Administration. But those averages are a bit misleading. It isn’t uncommon for Americans to live as long in retirement as they did in the workforce.
What does that mean for us?
First, many of us will face new realities when we retire. If the president succeeds in shoving private accounts down the throats of Americans and changes the basis for calculating Social Security benefits from a wage base to an inflation base, benefits will be cut from a quarter to a half of the levels expected today.
Second, greater responsibility for a comfortable retirement will shift to the shoulders of every American. Assets are likely to be held in one’s personal portfolio, in 401(k) and 403(b) plans and in traditional or Roth IRAs. That will require a greater hands-on approach to coordinating retirement planning.
The time to learn about asset allocation and diversification is today. Managing assets will challenge many people, but the future of personal finance is in self-dependence, not reliance on an employer or the government to manage those assets for us.
If you want your money to outlive your time, you can’t ignore it any longer. All Americans are going to be forced to take on greater responsibility for their own financial well-being. It’s your future and it’s your money.
Don Kuehn is a retired AFT senior national representative. This column is intended to increase knowledge and awareness of issues of importance to members and retirees. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to dkuehn60@yahoo.com.
