Living in Florida isn't always about sunsets, beaches, and blue skies. When the hurricane hit Siesta Key, my family evacuated to my parents' house. We watched in horror as the storm raged outside, huddled before a roaring fire in their fireplace. |
The year is 1980. Bill and Eleanor Gadd, recently retired, are looking forward to a new chapter in their lives.
Bill had worked in the plumbers union for nearly thirty-five years. His union was important to him. Those were his friends, and it had taken years to accomplish their fair treatment.
All that hard work had paid off in the form of a pension. The pension formula looked something like this:
Bill would receive 35 (the number of years he worked) x his final salary x 1.8%. That equaled a monthly pension of $1,050 per month (in today’s dollars $3,600/mo).
He also had the option of adding Eleanor to the pension. Therefore, he chose the "joint with survivor benefit option." This simply meant that she would continue to get the pension if Bill were to pass away first.
Since both were now covered, the actuaries had to lower the monthly amount to $3,400. They may have to pay the pension out longer.
Bill and Eleanor weren’t great savers. They retired with about $50,000 in their bank account and no other investments. They never really trusted the stock market and were happy to see their money grow at the bank utilizing bank CDs.
Between Social Security and Bill’s pension, they had $6,500/mo coming in each month (in today’s dollars).
Each month the exact same amount of money came into their bank account. They felt very comfortable.
They knew that if one of them passed away prematurely, the other would not have to adjust financially at all.
If they both lived to be 100 years old, they never had to worry about running out of money.
Knowing this, Bill and Eleanor felt little stress regarding their retirement finances. They spent those monthly checks on things that were important to them. Instead of worrying about money, they focused on family, relationships, and fun!
Now, let’s take a look at Jack and Dorothy.
Jack and Dorothy retired last year. Jack had a good-paying job as a quality control supervisor at a cracker factory. Over thirty years, every single cracker left that facility crisp, fresh, and without the slightest imperfection.
Jack utilized a 401k option offered by his employer in lieu of a pension. A traditional pension was not even an option. Having saved $900,000, Jack and Dorothy felt some real fear.
What if the stock market crashes?
What if we lose all our money?
What if the money runs out before we die?
"Maybe we should spend as little as possible, watch the financial news, and freak out each evening," Jack quipped, somewhat jokingly.
Each month, Jack and Dorothy struggled over how to pay their bills. They only dipped into their investments if they HAD to, and when they did, it was painful. Jack and Dorothy eventually both died of heart attacks, partially attributed to worrying about their 401k (I may be exaggerating a bit for dramatic effect).
What is my point in all of this? After twenty years in this industry, I have come to a strong belief:
Switching from a pension model to a 401k model is the dumbest thing that’s ever happened in the history of retirement benefits.
It is absolutely ridiculous that human beings have been forced into using financial instruments, which they don’t understand or trust, for their retirement. Not only that, but everyone around them is trying to scare them.
From CNBC.com: "The Economic Policy Institute recently declared 401(k)s ‘a poor substitute’ for the defined benefit pension plans many workers primarily relied on."
How did this happen? How did we go from a happy, relaxed pension system to a terrifying investment system?
The biggest reason? Employers wanted to shift the responsibility away from themselves. From an employer’s point of view, putting the onus of saving onto their employees takes all the risk away from the employer. It also saved the employer a ton of money.
But this is the problem: people are only human. Human beings cannot handle this kind of responsibility. They are not saving enough. They are investing it poorly. The whole system has been an abysmal failure.
Wall Street is getting even richer because they can charge fees on the 401ks. Annuity salesmen are preying on unsuspecting seniors. Everyone wants a piece of the pie. The entire thing is a complete mess.
So what’s the solution? The 401k model is so embedded into the system I don’t see it changing any time soon. Wall Street especially does not want it to change, and Wall Street has a lot of money to fight change.
In the end, as I see it, the answer is this:
First, you need a trusted professional in your life to invest the money in an appropriate and unemotional fashion.
Next, you must read my weekly articles that shield you from the torrent or inflammatory rhetoric.
Next, you start taking the correct amount of monthly money from the accounts. Not too much and not too little. I recommend 5% per year if the money is invested in stocks and bonds, with at least half of the money in stocks.
Finally and most importantly, you look at your statement once a year and then focus on something better.
Now, the good news is that if you handle it correctly, you will end up far wealthier than the pensioners of the past. Considering the growth aspect of stocks, you will end up with way more. You don’t need to have a heart attack. I promise.
Be Blessed,
Dave