The Retirement Challenge
The market crash of 2008-2009 has raised awareness of the nation’s looming retirement crisis. That crisis has three main elements:
- Traditional sources of retirement income have either largely disappeared (pensions) or are economically at risk (both pensions and Social Security).
- The long-term savings rate of most American households is far below what is needed to accumulate sufficient capital for a secure retirement.
- The combination of rising longevity and long-term inflation means today’s retirees will need much greater financial resources in retirement than did their parents or grandparents.
Most Americans lack the financial resources for a successful retirement, both because they do not save enough during their working years and because they typically make poor investment decisions with the dollars they do save. Few Americans have access to the sophisticated planning resources needed to accurately define their capital requirements and manage retirement investment portfolios to meet long-term cash flow needs in retirement.
Retirement: Fantasy vs. Reality
Studies suggest there is a huge gap between the picture most Ameri cans have of their retirement and
the reality of the retirement they will actually experience.
Fantasy. Our fantasy of retirement was formed by the typical experiences of our parents’ and grandpar ents’ generations. The golden age of American retirement was from the 1960s through the 1980s. Back then, the expectation was to retire after a lifelong career at a single large institution (corporation, government or academic) and receive both a pension and Social Security, both of which were understood to be financially secure beyond question. Once Congress passed Medicare in 1964, retirees could also look forward to adequate health care, with supple- mental health care costs often fully paid by former employers (think General Motors).
Reality. Today both Social Security and private pensions face structural funding challenges. Few of today’s
private-sector employees can look forward to receiving a pension. Yesterday’s defined-benefit plans
(pensions) have been replaced by today’s defined-contribution plans (401k and 403b savings plans).
Promised payments of retiree medical costs are at risk (think General Motors again). The responsibility to
save for retirement, and the necessity of making prudent investment decisions, both now rest with the individual employee. The combination of increasing longevity and inflation can be devastating to retirees who over-spend, in particular if their portfolios lack sufficient longterm growth assets.
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