Whether it's the latest data from EBRI showing half of Americans are at risk of running out of money in retirement, or the endless stream of surveys pointing out that a whole lot of Americans are worried about their retirement prospects and the fate of Social Security, I think we have a clear consensus that we've got a big case of national retirement blues.
There's no better remedy than ramping up your personal savings, but at the same time, there's plenty that the politicos, plan sponsors and retirement industrial complex could be doing to help out as well.
Set the Record Straight on Social Security
The annual Social Security and Medicare Trustees Report is due out on Thursday, and given the sudden focus on Social Security as a deficit-reduction tool, we're headed for plenty of fear mongering on how broke the system is. It isn't. Mark Miller at Deep Pockets recently did a nice job explaining why Americans are so seriously off-base doubting the long-term viability of Social Security. Yes, the program obviously needs some fixing, but those fixes are not nearly as hard or dire as you might think, or as the Washington rhetoric machine suggests.
Focus on the Merits of Target Date Funds
I started covering 401(k)s about 20 years ago when you were lucky to have one stock fund, one bond fund and maybe a company-stock option. Today, plans typically offer 12 or more options. Money magazine had an interesting interview with Columbia business professor Sheena Iyengar about how too much choice can put 401(k) plan participants in a confusing jam.
That's why target retirement funds serve a vital role in retirement planning. Yet as the chart below from the Transamerica Center for Retirement Studies shows, employers are increasingly choosing cash equivalents, not diversified long-term portfolios as the default option when automatically enrolling new participants in the company 401(k) plan.
That's a troubling trend. We know from the laws of investor inertia, participants may stick with what they have been defaulted into, especially if they presume their plan "knows what it is doing." The problem is that there's no way anyone is going to build a sufficient retirement fund sticking all their money in cash for a few decades. I am on the record that target funds aren't perfect, but they are definitely better than cash as a default investment.
Get Behind 401(k) Auto-Escalation
I think we can all agree that saving more is the hands-down winner in addressing retirement anxiety. But most 401(k) plan sponsors have been slow to add a feature that would automatically-and gently-raise participant contribution rates by 1 percentage point or so a year up to a set limit of 10 percent or so. The party line on this has been that plan sponsors a) wanted to first see if automatic enrollment would be accepted by employees and didn't want to muddy the waters by simultaneously adding an auto-estcalation feature and b) employers were wary that employees would balk at being nudged to save more for retirement.
Auto enrollment has indeed been a resounding success. But the static 3 percent default contribution rate that is typically used with auto-enrollment is subpar. It's time for plans to get behind higher contribution rates. Moreover, as I reported earlier, one of the nation's leading 401(k) consulting firms says there is already anecdotal evidence that employees are just fine with being nudged into higher contribution rates.
Explain Life Expectancy
In terms of retirement anxiety, outliving assets is a chart-topper these days, reportedly dreaded more than death itself. That's in large part a function of the fact that we're now in charge of managing our 401(k) and IRA withdrawals so they don't run out. Talk about pressure. Yet if you merely think you will live to your average life expectancy, you are in fact raising the odds you could indeed run out of money. Average life expectancy is not a prediction of when you will die; it is rather an estimate of when you have 50-50 odds of still being alive. So when you hear that a 65-year-old woman today has an average life expectancy of nearly 20 years, what that means is that half of today's 65-year-old women will still be very much alive at 85...and needing their 401(k) and IRA assets to support them. That's why the best retirement calculators choose pre-set life expectancy defaults well into the 90s. That's a better belts-and-suspenders way to plan so you won't run out of money. Plan sponsors could do a whole lot of good making life expectancy a focus of communications/education/financial "literacy" initiatives.
Show the Real Value of a 401(k) Lump Sum
Even if you appreciate the fact that you may indeed live a very long time, it's not exactly easy understanding how much you can afford to spend down your retirement savings lump sum balances each year, and still be assured your money will outlast you.
A huge help here would be for every 401(k) statement to include an estimate of a sustainable annual withdrawal amount in retirement based on your account's current balance. A bipartisan Lifetime Income bill was introduced in the Senate late last year to do just that. But it's gone nowhere.
This one change could have the most long-term impact on curing our national retirement anxiety. If you get your annual statement and aren't thrilled with the estimate of your future spend-down level, it helps focus you on steps you can take today to ensure your retirement will in fact be anxiety-free. And that's the ultimate goal of every retirement plan.