…and we keep getting told everything is fine
Now, not a week goes by without some story declaring that retiring baby boomers constitute one of the richest generations in history. Far from being poor, they’re now dubbed “The Luckiest Generation,” sitting on a staggering $78 trillion in assets that even a dour media can’t ignore…
The seeds of the retirement crisis that never came were sown in the 1960s, with the termination of several big private-sector-defined pension plans, most notably that of the Studebaker-Packard Corporation in 1963, where workers were left with little of what they had been promised…The share of private-sector workers covered by defined-benefit plans consequently shrank rapidly, from about 46 percent in the 1970s to just 15 percent today. Only 4 percent of private workers now rely entirely on a defined-benefit plan for retirement…
If anything, the persistence of government defined-benefit plans—which cover about two-thirds of state and local workers—has proved the wisdom of shifting away from them in the private sector. These plans quickly became severely underfunded and have forced taxpayers to ante up tens of billions of dollars just to keep them afloat… Even so, the plans remain underfunded by more than $1 trillion by their own accounting standards, and by more than $6 trillion using more credible standards…
A recent Gallup poll found that only 43 percent of workers believe that they’ll have enough money to live comfortably in retirement. By contrast, 77 percent of retirees in the same poll said that they are living comfortably. That’s nothing new. For 20 years, according to Gallup, people’s expectations of the life they’ll live in retirement have significantly trailed the reality experienced by those who are retired.
The deeper I get into writing about retirement finances, the easier it is for me to understand why working people are more nervous than actual retirees.
For one, there’s tax rates. If you’re working and investing, the money you’re able to sock away outside of something like a Traditional 401k is generally taxed at your marginal rate. So if you add Social Security, federal, and state income taxes, you might find yourself in a spot where you need to earn $1,000 in additional income to save around $600. That gets in your head, and it’s tough to see past it to a time when you’re no longer paying Social Security taxes, no longer having to save new money, and face lower tax brackets due to lower income levels.
For another, there’s life stages and expenses. Imagine you’re a 40-something professional with a mortgage, two teenage drivers, a kid in college, and a senior parent who needs your help. You’re facing a ton of very high expenses all at once, and it’s hard to see past that to a time when your kids are independent, your mortgage is paid off, and your parent no longer needs your help.
For yet another, there’s compounding. Long-term compound growth charts typically rise slowly at first and then appear to shoot upwards near the end. It can be hard to wrap your mind around how the $200,000 you have saved in your retirement account after 20 years of work could potentially reach over $1,000,000 after another 20, even if you don’t add another dime.
And in addition, there are the things you don’t really go looking for until you need them. My grandmother lived in a subsidized senior living apartment complex for a few years until she needed nursing home care. It was safe, affordable, well-kept, and it enabled her to live on a modest Social Security benefit. I had no idea such a place existed until my mom found it for my grandmother, but it helped her turn a really tight retirement into one with sufficient comfort.
Is it a matter of the distribution of the loot? Half the boomers are broke, but some of the rest have a huge stack, that raises the average? Concentration of capital in a few hands was the stated objective of “supply side economics”, so it’s “mission accomplished” for the supply siders.
As for the broke half: that is where we hear the “traditional family values” argument: the old should sponge off of their siblings and spawn, rather than “burden” those with the most with taxes for their support.
It’s the same in the UK.
I kept working longer than I needed to unfortunately. I sold up two years ago and now notice that my spending has dropped dramatically, something other retirees tell me has happened to them.
Many will just work to survive:
Defined benefit pension plans seem to be making a comeback. Part of the UAW strike demands.
With defined benefit company is responsible; employee has few decisions to make.
Defined contribution reduces employer responsibility. But employees must choose investments. Too many fail to contribute or take the cash and pay penalties as soon as they can. They think they need the cash.
Until it files bankruptcy and pays HUGE “retention bonuses” to mgmt for their incompetence.
Yes, it can happen. They can cancel the pension plan at any time and pocket the cash.
Choosing your employer is one of the biggest financial decisions you will make in your lifetime. Choose wisely.
If you are working for a company not likely to go the distance its a good idea to go looking for a better employer.
The previous Gov of Michigan promised he would not sign a “right to work” law. Once he was in office, the (L&Ses) passed a “right to work” law, and he eagerly signed it. Our current Gov and legislature, repealed it. So the former Gov, a “JC” himself, has reentered the political fray, promising to work to reenact the “right to work” law.
I would not be surprised, if unions become a “problem”, a “right to work” law that revokes all collective bargaining rights, is passed at the Federal level.
Same thing happened Missouri. Passed right to work law to compete with neighboring states. But then repealed it.
Right to work is popular in the South. Not strongly anti-union but allows you to work at a union plant without joining union or paying union dues. That is strongly opposed by unions. But of course unions are stronger in blue states.
Right to work laws have helped move manufacturing jobs to the Sunbelt for years. Auto plants like Tesla are going south. Amazon flirted with NYC but ended up in Virginia after strong union opposition.
Expanded Panama Canal makes southern harbors attractive and major distribution centers (and auto plants) locating nearby.
Reaping the benefits the union fought for, without paying union dues, is clearly scummy.
Some “right to work” laws go farther. I read one or two, years ago. I forget which states. The laws explicitly prohibited anyone negotiating pay and benefits on behalf of a worker. That negotiation is what the union does, with the lever of mass withholding of labor, to back up the bargaining. What the “right to work” laws said was each worker, on his own, negotiates with the “JC”. What leverage does a single worker have? None. The “JC” takes a take it or leave it attitude: accept what the “JC” wants to do to you, or he hires someone else. That was the attitude when RS cut manager’s pay, by, depending on the manager’s situation 30-40%. There was grousing at the monthly manager’s meeting about the cuts. The DM’s reply “that’s the way it is. if you don’t like it, turn in your keys”.
T-T-T-T-Talk’n 'bout my generation …
Long weekend for the markets - we need some clicks. It looks like someone at Yahoo Finance decided it was time to dust off the old story that has been run every few years for decades about the Boomers. I’m not going to do a search but I’ll bet the Silent Generation had similar stories. (Head’s up Gen X, Millennials, Y, & Z your turn in the barrel is coming. I won’t be around to see if I am right, but I know that I am.)
Regarding the Boomers a couple of things are either left out or given short shrift. The left out consideration is pensions. Many Boomers are collecting pensions. I do. It is not generous, about 25% of my final salary. (And Indiana wonders why it has trouble attracting and retaining teachers.) The one given short shrift is SS. Does anyone think that either party will tell a large and reliable group of voters to go suck an egg?
Is everything fine? Obviously not, but Chicken Little, I don’t think the sky is falling either.
I managed a union shop a few years ago. Kansas being a right to work state not every employee belonged to the union. I asked one of the union stewards how does that work. Do they represent nonunion members? He said they were required to. What isn’t stated is how well we have to represent them. He grinned and I understood.
What surprised me with the union was how they handled discipline. An employee had a safety infraction, and I wrote him up for it. Of course the union rep had to be present for the write-up. There wasn’t any dispute about the safety violation occurring. It was just a matter of documenting that it had happened. The union rep was far harsher with the employee than I was.
I know that’s the perception. But in a taxable account you can invest in a vehicle like Berkshire Hathaway, defer taxes forever, and then pay lower capital gains rates when you sell. Meanwhile, the 401k investor pays higher ordinary income tax on his withdrawals and is forced to do so when RMDs start. I’ve never met a successful retirement investor who didn’t wish he put less in his IRA/401k, and more in the Roth or taxable account.
I do too. Mine is small but regular income. I have the impression that police and fire in this area and government workers still get pensions.
Companies don’t like them especially when liability goes up and down with the stock market and is beyond their control. They like nice orderly growth in earnings to max bonuses. But stock market as an uncontrolled variable is a negative.
Roth is a great idea but its after tax. So may or may not be good. Great if your investments do well. Roth 401K is best. Regular Roth has low limits. $5K this year, $7500 if over 50 (I think).
Most sizable Roths come from Roth conversions. And they are costly for large accounts–often accumulated as 401k. Not sure about current limits but used to be about $20K pretax. And for “highly paid employees” limited by participation of other workers. You can also get large sums if you take pension as a lump sum to an IRA.
If you work 30 years and contribute regularly million dollar IRAs are very possible.
When my uncle first hired in to Western Electric, or Electro Motive, accounts vary, in strongly union Cleveland of the early 50s, he refused to join the union. (stiff necked Hollander from anti-union, west Michigan) He was being pranked constantly. Irritating stuff, like hiding/stealing his lunchbox. He got out of EMD by going to Western Electric, still doing wiring. He eventually worked into training, which took him out of the union area. I don’t know if he ever joined any union, anywhere. Of course, if he had been in the union, Lucent might not have been able to gut his retirement medical benefit the way they did.
Many boomers also inherit.
Add that to the list of reasons retired people are not so worried about it.
I don’t think so, anymore. There’s the Pension Benefit Guaranty Corp, a Federal entity now that backs all DB plans if the issuing company goes under. Another bit of our levered taxpayer $ at work, keeping people off the streets when our corporations won’t.
I hope you are right. There certainly are people who lose their pensions when companies fail. They do get payments from PBGC, but the benefits are capped and often well below what the company plan promised.