Record Of Special Events: The Impending Retirement Crisis

Thursday, March 26, 2009

The Impending Retirement Crisis

We haven’t even gotten through this crisis yet, and we have another one on the way? Seriously?

That’s what John Bogle–the founder of Vanguard and the creator of the first index fund–would have us believe. And, distressingly enough, the case he makes is pretty convincing.

Last month, Bogle testified before the House of Representatives about the upcoming crisis of failed retirements. His testimony included a number of noteworthy statistics:

We’re not saving enough

The median IRA balance is just $55,000, and the median 401k balance is just $15,000. Sure, if you’re in your twenties or thirties, having $70,000 saved up is excellent. But given that the largest portion of the investing community is the baby boom generation (who are now retired or retiring soon), $70,000 is nowhere near enough.

In short, most people simply aren’t saving enough. In fact, they’re not even close.

An asset allocation nightmare

One of the best things about 401k plans is that we’re allowed some options in terms of how we want to invest our money. Unfortunately (and perhaps unsurprisingly), a significant portion of investors are making rather poor decisions:
Nearly 20% of investors in their twenties have literally zero exposure to equities (stocks) in their 401k. In other words, they’re invested entirely in bonds and money market funds. With no access to the long-term growth provided by equities, it’s practically impossible for an investor to accumulate the money necessary to retire.
At the other extreme, more than 30% of investors in their sixties have greater than 80% of their 401k invested in equities. Such a high equity exposure is dangerous for somebody so close to retirement. I can only imagine how these investors are feeling after the last year in the market.

Delayed gratification? No thanks.

When changing jobs, 60% of all 401k participants cash out at least a portion of their 401k and use it on something other than saving for retirement. Not only are these investors hampering their ability to achieve long-term growth, they’re subjecting themselves to an extra 10% tax that comes with early withdrawals from retirement plans.

Apparently we just can’t wait to spend our money.

What can we do?

You and I aren’t John Bogle. We don’t have a free ticket to speak to the U.S. House of Representatives anytime we want, so we’re unlikely to play a major role in any system-wide investment industry changes. That’s the bad news.

The good news is that we can certainly make efforts to ensure that we don’t become a part of this mess.

Check your asset allocation. Make sure it’s in line with your age, your goals, and how much you’re going to be able to invest each year.
Make sure you’re saving enough. In the past, finance experts tended to recommend investing 10% of your gross income. In recent decades, that number seems to have jumped to 15% as a result of longer average retirements and increased late-in-life medical bills.
Get used to the idea of delayed gratification. Money in your 401k is not meant to be spent before you retire. No exceptions.

What about you? What retirement-savings pitfalls are you taking extra care to avoid? And what are you doing to avoid them?

About the author: Mike writes at The Oblivious Investor, where he reminds readers that long-term investing success has nothing to do with short-term fluctuations in the market. Subscribe to his blog for daily updates.

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