Implications of Retirement Decisions
We make hundreds of decisions every day. Some more important than others, but the ability to weight opportunity costs in a given situation is crucial. One of the big decisions facing the generation of baby boomers right now is how they are going to support themselves during retirement. Making decisions about retirement savings is fundamental to a sound financial plan for the future. However, data from the National Retirement Risk Index seems to show a dramatic reduction in savings sparking some to speculate about a retirement crisis in the next 15 years.
Fidelity Investments recommends that the average 60-year-old have 10x their annual income in savings. According to the Wall Street Journal, the median household headed by someone between the ages of 55 to 64 has little more than $100,000 in retirement savings. And with the median US income around $50,000, this amount of savings is clearly just not enough. Even with a booming stock market, these statistics are concerning. Low-interest rates, also mean that the return on bond investments has diminished. The impact a retirement crisis could have on the economy could be dramatic, requiring substantial support from the federal government. Social security faces a long-term deficit as well and without reform, benefits would be cut significantly.
Why is it that baby boomers have chosen not to prioritize retirement savings in their long-term financial goals? It should be well known that the “value in use” of a healthy retirement plan is incredibly high. Without income, Americans must rely on this to support themselves with the intention of sustaining their standard of living. However, when evaluating whether retirement plans are worth purchasing from the customer view, it is possible the order qualifiers are just not clear enough. Reduced savings means more spending which is good for the economy but that cannot be sustainable. People are living longer which means they are spending more in their retirement. Rising healthcare costs also pose a risk for those lacking sufficient retirement savings. All of these factors should result in more savings than historical averages but the actual result is the opposite.
The decisions retirement and financial planning firms make could also be affecting this. The way they have tried to educate consumers about the importance of their service could be lacking. Ultimately, however, the real ability to make a change lies with the legislative decision makers. Reforming social security and supporting the lower and middle class while encouraging everyone to save more will be beneficial. Legislators can also make it easier for companies to offer 401K plans to their employees. Overall, many economists believe that we do not need a new system, we just need to make sure it is well-funded and works well.
Article: https://www.cnbc.com/2017/12/29/in-retirement-a-1-million-nest-egg-isnt-enough.html
Other Sources: https://www.wsj.com/articles/is-there-really-a-retirement-savings-crisis-1492999861?mg=prod/accounts-wsj&mg=prod/accounts-wsj
Other Sources: http://crr.bc.edu/wp-content/uploads/2017/02/IB_17-4.pdf
Other Sources: http://crr.bc.edu/briefs/nrri-update-shows-half-still-falling-short/
Robert,
The general lack of saving for retirement is a serious issue that needs to be addressed. Given the current federal deficit, coupled with the increase in average life expectancy, severely threaten social welfare programs like social security and medicaid that many in previous generations relied on for retirement. It is essential that more people recognize this threat and adjust their lifestyles accordingly.
Identifying order qualifiers and order winners in a product like a 401k is difficult for consumers. The product is not a shiny object directly in front of them. I agree with your point regarding the lack of education by financial planning firms. I think they need to change the narrative, and more aggressively promote the importance of saving for retirement.
Robert,
The recent trends highlighted in your blog post that people are turning away from reasonable financial planning and towards an increasing consumerist culture is troubling. As you stated in your post, there are many factors that should be pushing people in the opposite direction, away from reckless spending and towards a more controlled retirement plan. These factors include sky rocketing health care costs and an overall increase in average life expectancy. Not only are people living longer, but the cost of living is rising too!
You mentioned that the order qualifiers are not realized by people who briefly consider retirement planning but buy something else instead. I would argue that while this is true, order winners are what are truly being overlooked. I believe the order winner of responsible retirement planning is security and peace of mind, but because the federal government is committed to providing care for the American people by way of various social programs, like Medicare and Medicaid, Americans do not see the order winner of retirement packages as a true order winner. For someone of my generation, these trends are very worrisome, because I will most likely never get to realize the benefits of these financially disastrous social systems yet will still be forced to contribute to them until they are either overhauled or eradicated completely.
Robert,
This is a very interesting decision-making topic to bring to light. I am particularly interested in how an increasing life expectancy is challenging the traditional preparation of a retirement fund. I disagree with the opinion that a new system is not the answer. I think a new system needs to be made to accommodate the shift in lifestyle, cost of living, life expectancy, etc. Forbes article entitled “The Disturbing Trend That Will End in a Full-Fledged Pension Crisis” describes how many believe that the gap in money needed for retirement will be filled by increasingly strong investment returns, higher taxes, and increasing employee contributions. However, I think it is not smart to rely on this to salvage pensions. According to the 2017 report, total unfunded pension liabilities have reached $3.84 trillion, which has grown $434 billion since last year. This amount and growth is concerning. I believe that the solution is to not rely on risky factors like investment returns but instead to rework a new system that caters to this large amount of debt.
The other side of this argument, as you mentioned, is to keep remaining systems but rework them to make sure they are well-funded and run efficiently. I find it interesting that you also mention that the rising cost of healthcare poses a risk for those who have not saved sufficiently for retirement. If these changes were expected to save more than historical averages, then maybe a solution would be to adjust the current system to move in the opposite direction.
https://www.forbes.com/sites/oliviergarret/2017/06/09/the-disturbing-trend-that-will-end-in-a-full-fledged-pension-crisis/#73469e206620
Robert,
Retirement savings is definitely an important decision to make in every person’s life. Honestly, it may be one of the most important decisions we make as we start our young careers in whatever profession that we choose. One of the key benefits of using a retirement savings plan, such as a 401k, is that the money within it can grow tax free until taken out of the account. Therefore, doing so can reduce your taxable income as well as help you save for the future.
Another savings account that I feel would be beneficial to mention is a Health Savings Account (should the employer choose to offer this). The health savings account allows you to set aside money that you earned into an account that can only be used for qualified medical expenses. The money put into this account is also tax free, meaning that your taxable income is reduced even further. Basically, every paycheck, you can elect set money aside for any medical expenses that may come up over the course of life.
Personally, I didn’t fully understand the benefits to either of these accounts until they were explained to me during my internship this summer. Now, after the explanation, I will definitely be devoting a portion of each pay check to both of these accounts. Therefore, I feel like the best form of encouragement will be to further teach young professionals the benefits to saving and how saving a little bit with each paycheck will greatly benefit them in the future.
References:
http://www.hsacenter.com/how-does-an-hsa-work/
Robert,
I think you bring up a really good topic here related to decision making. While this topic doesn’t necessarily only have to do with firms directly, sometimes it is important to look at things from a consumer’s perspective (or in this case, the American population as a whole). My views on this topic might be slightly skewed considering I’m still relatively young and in college, but regardless it is important to consider the idea of retirement savings because at some point we will all be in a position where this is a reality.
I found it interesting how you mention that this might partially be a problem stemming from retirement and financial planning firms and their lack of promotion, but I would argue that this is mainly a problem of the world we live in and the generation that is preparing for retirement. Today, products are services are so easy for consumers to obtain because so much can be purchased from a smart phone or computer. I believe that instant gratification and the accessibility of so many things have caused people to spend more and therefore save less. In a society where everything is obtainable almost immediately, it’s easy to get caught up in the short term and not necessarily be focused on saving for retirement in the long term.
Matthew,
I liked the point you raised about the rise of e-commerce and the impact of instant gratification on long term planning and goals. I think, historically speaking, this baby boomer generation has been fortunate enough to live in generally prosperous times. Many of them began working during times where the economy was booming and money was abundant. I think this imminent retirement crisis that Robert mentioned in his post can be likened back to the housing crisis of 2008/2009. People got caught up in buying homes and they spent themselves into an impossible situation resulting in an economic crash. People who grew up in abundant times thought that the markets would never go down. There was a general lack of foresight there that I think is now reappearing in a retirement planning context. People aren’t properly valuing the future health of their finances as much as the immediate gratification that e-commerce brings with it. The question is what can retirement planning firms do to change people’s focus and reinforce the importance of this idea?
I agree with you that there is an issue with instant gratification and the fact that more than ever people want things immediately. We are living in a world where you can order something on Amazon and it can be delivered to your doorstep within a mater of hours. However, retirement funds challenge this custom by exemplifying delayed gratification.
It is interesting that the topic of promotion came up. While I agree that there is very little promotion for retirement fund, in my Strategic Brand Management class last semester we did look at a campaign by Prudential. It sought to get people to start investing in their retirement fund by showing how a small amount know can make a big difference later (https://www.youtube.com/watch?v=zb7ki1ZN1iY). To do this they organized an installation with dominos that showed how just by investing the small amount of money in their pocket they could eventually knock down the huge fund they need in the future. I think this campaign is smart because it shows that people can still make the purchases that give them instant gratification, but they can also make small choices that will help them in the future. It does a good job with educating people, especially millennials, gets them thinking about their future, and retirement saving.
Caroline, I really like this campaign; good for Prudential for trying to raise awareness. I think it’s interesting that in the Journal article that Robert posted that two experts can disagree in an argument and still have valid statistics and support to back themselves up.
Regardless of who was right or whether there really is a crisis (the debate certainly showed accurate support on both sides), it certainly stands to reason that people need to save for retirement. Social Security is a ticking time bomb, and marketing campaigns like these will shed light for those who may not have saved enough. Those who have been saving and have adequate savings for themselves are able to disregard the message, while those who need to take heed can do so.
Caroline,
Your discussion of the Prudential campaign provides a good example of how promotional strategies taken by companies can make a difference. I think it is very effective for Prudential’s strategy to emphasize that the immediate commitment is small but the end result is large and will be well worth the long-term commitment. I agree with you in that this advertisement targets millennials, who are at a key age to start investing in their future security. I think if more companies followed in Prudential’s footsteps, the concept of saving small amounts for retirement starting at a young age will become more commonplace, thus people will be more likely to invest sooner.
Matthew,
I find your discussion regarding lack of promotion very interesting. I agree that we live in a world that promotes spending instead of saving. I think the consumer culture of spending money on superfluous items has contributed to this epidemic. Companies that want to make money by selling products and services would be risking their own profits by promoting saving. I agree that today’s society makes it easy to only focus on short-term satisfaction and security. I think that the promotion of saving instead of spending combined with increased education regarding the importance and necessity of retirement planning and saving would contribute to mending this national issue.
Matt,
I have a few thoughts on your reply. Although I understand that, in today’s world, people focus on the short term much more than the long term, I think it is pertinent for everyone to understand the very high need for financial planning. Even though you’re in college right now and are young, retirement planning is essential for you to think about now. Robert is right in his original post that people should start making decisions now to benefit their future self. When we have graduated (which is sooner than I would like to think about), it is my goal to obtain a job with a great 401K plan and I think everyone should have that in their career goals as well. Financial planning in general right now is something everyone should be doing. We may not have the experience yet to know exactly what to do with our money, but that is what financial planners are there for. We must act now to benefit our future selves.