A Death Sentence For Your Retirement Savings
By Chuck Jaffe
BOSTON — Jennifer W. is a single woman in her late 40s who is worried about her investment future and puzzled by her investment past.
Like many people her age, she has been encouraged to save as much as possible through individual retirement accounts and 401(k) plans in order to grow her retirement nest egg. She started doing that as early as she could, with as much money as she had.
Along the way, however, there were kids, a divorce, job loss and change. Couple some financial setbacks with 10 years of market volatility that has mostly resulted in flat-line long-term results, and Jennifer’s mutual fund accounts look better than when she started, but not great.
“I would have thought that by now I’d be a lot farther along toward retirement,” she wrote in an email. “I hate debt, so I try not to have any, and I don’t mind saving, but I do mind struggling and having accounts that don’t seem to be going anywhere.
“I’m not comfortable with mutual funds now,” she added, “but I know so little about stocks that I would probably do worse on my own.”
Her response to these problems? She’s not going to contribute to the company retirement plan this year — her employer does kick in a small amount on behalf of all employees — and she’s not funding an individual retirement account.
Indeed, many people like Jennifer have become completely frozen by disappointment and circumstance. They’re giving up the accumulation edge they get from the federal government when it comes to IRAs, 401(k)s and other tax-advantaged accounts. While statistics show that consumers have stepped up their debt reduction and savings, it’s still not the norm.
Doing nothing isn’t a solution, it’s a death sentence for your retirement savings.
Going nowhere fast
At least Jennifer won’t wind up “another year older and deeper in debt” because she’s paying off remaining debt and setting aside some cash for savings. But she also isn’t likely to get much closer to her goals this way.
There’s the rub, and it’s one that investors everywhere are feeling.
A survey released this week by Putnam Investments showed that almost 40% fewer Americans will fully fund their IRAs in 2010, compared to 2009. More than half of the people who did not make any set-aside in 2009 said they lacked the cash to invest or preferred to keep the cash available. Another 25% did not invest because they are worried about market risk.
In overall savings — going beyond IRAs to look at other investment options — the survey showed that 60% of respondents are not increasing the amount they set aside this year.
It’s no surprise, therefore, that more than 60% of the group thinks that their savings “are unlikely to provide … a sizeable retirement nest egg.”
Clearly, Jennifer is the personification of the survey, because she understands the disconnection between the need to save more and the hardship of getting it done.
Not like the old days
In the booming 1990s, investors could do minimum set-asides and “let the market save for me,” meaning they were getting such oversized gains that smaller contributions were less of a problem. Those days didn’t just disappear in the first bear market of the past decade, they’re not coming back any time soon. Even the most optimistic investment strategists aren’t calling for long-term returns above historic norms.
“All of the numbers can be scary, so you really need to understand what you will need in retirement and then work back from that number,” said Jeffrey Carney, head of retirement and global products at Putnam. “You need to know what it will cost to maintain the lifestyle you want, and then you need to create a portfolio that delivers that income.”
That sounds simple and intuitive but, as Jennifer’s case shows, a lot of people still can’t bring themselves to follow the generally prescribed retirement-savings path.
“There is a spectrum of solutions that need to meet two key things,” Carney said. “First, what kind of resources you need to have based on your goals and assets and, then, how much risk you are comfortable taking to get there. Right now, many people are not comfortable taking investment risks, so they have to scale back, be more conservative and at least be comfortable getting through the accumulation period with as much as they can save.”
Obviously, investors can try to learn about stocks, bonds and mutual funds, and see if they can’t increase their comfort level, but the bottom line for the foreseeable future is that investing just isn’t going to be something many average investors get “comfortable” with. That won’t make it any less necessary.
Mutual Producers Group Response:
by Tim Hartsough
MPG Banking is the answer to this dilemma!
The problems contained in this article regarding the professional advice being given will really help no one get any closer to a secure retirement.
Jeffrey Carney explains that all you need to do is to define how much you need to maintain your lifestyle when you retire and then work back from that number.
That’s going to require a very long list of assumptions to work:
What is the tax rate going to be when you retire?
How long do you plan to live?
What if there is a recession as you approach retirement age?
Jeffrey Carney also explains that after you determine how much you are going to need to retire, all you need to do is then is create a portfolio that delivers that income.
If I had a crystal ball and my lucky rabbits foot I might be able to come close but isn’t this fundamental problem that this article is exposing . . .
These portfolios that Mr. Carney is referring to do not exist. At certain periods of time they may have appeared to provide some hope, but the truth is if this conventional wisdom and the ways that we all have been taught to save for retirement were actually working, this article would not exist.
The polls provided in the article, are an accurate indication of the truth.
Americans are starting to clearly understand that investing in the stock market is risky. Is this how we intended to fund our inevitable retirement, with something so volatile and unpredictable? There is a better way . . .
The time of the old A.L.Williams philosophy, buy term and invest the difference, is over!
Infinite Banking is the solution that every person interested in saving for retirement can utilize, with No Risk, Guaranteed Tax Free Growth, Tax Free Distribution , predictable growth and complete confidence that they will NEVER outlive their money.
And of course, almost as a side note, this same banking policy that will provide you secure predictable retirement will also pass a sizeable inheritance to your heirs tax free.
One last point, why do you think we refer to this strategy as MPG Banking?
The financial product we leverage for this solution also offers you the ability to take out loans and repay them to yourself…in essence, you will own a system that operates very much like a bank or lender, but in this case you have Become your Own Banker. Once you see the momentum you can create by transferring debt you owe to someone else, to yourself (principal and interest), you will see your wealth grow faster than you ever imagined possible. You can find out more about how to create your own bank through MPG’s Banking strategy at.