Pension Benefit Guarantee Corp. Director Josh Gotbaum said Friday increased financial literacy can’t eliminate the retirement crisis.
“We have to stop pretending just financial literacy is enough. No matter how successful financial literacy efforts are, people are not pension and investment experts. Most people are not Warren Buffett. We have to do more than that,” Gotbaum told the Hispanic Heritage Foundation Latino pension fund trustee forum in Washington, D.C.
One measure that would help, he said, would be to increase annuity options in defined contribution plans in an effort to produce lifetime income.
He also advocated simplifying the process of retirement saving. “You shouldn’t have to have 37 decisions and file 14 different forms to save for retirement,” Gotbaum said.
The PBGC executive said that left to their own devices, workers don’t save enough to last until they die.
“My shorthand for this is actuaries do the math, and the rest of us don’t,” Gotbaum said. He added retirement is 22 percent longer on average than 50 years ago.
Another problem with individuals saving for their own retirement is that they pay higher fees to invest than pension plans do.
Unlike commonly assumed, the PBGC director said, defined benefit pension plans are not dead. The plans cover 75 million people, including 36 million active workers.
Pension Exec: Financial Literacy Not Answer To Retirement Crisis
June 27, 2014
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While I agree that annuities as an alternative aren't the best choices necessarily, I don't agree that it is easy for the general public to figure out the solution. I don't know what Mr. Gotbaum is talking about when he talks about making "37 decisions and filling out 14 forms" to save for retirement. That is a gross over-statement of the complexities. One can open an IRA account with a bank or a retail on-line brokerage with one form. The same applies to a 401k account with an employer. The difficult part is deciding how much to save and what to invest the savings in. Most 401k-type accounts are now offering as a default a target date fund (fund of funds). Not a terrible choice. But the decision about how much to save is tougher and the suggested solution by another comment just is too hard and most people simply will not do what is suggested. Most of my clients would have no idea what the "discount rate" means. IF you believe that the "4% rule" is roughly correct, then it really is pretty simple. Take what amount you need annually to supplement social security and any other guaranteed income stream and multiply that by 25. That's how much you need going into retirement. The problem is that few people have any idea what it really costs them to live today and what it might cost them in retirement. And when they figure it out the resulting number they have to save is way to high for them to accept. So ultimately they will adjust their lifestyle to what they can afford, like it or not.
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neither are fixed pensions the answer. The sad fact is that most people with a pension lack the understanding of what inflation can do over a 20-30 year period, much less 40 year period. Too often, pension give a false sense of security that is burst when it is too late to fix. For years I talked with people who said "I don't need an IRA, my company is taking care of my retirement". Unless you truly believe inflation will not affect retirement needs, here are some numbers to contemplate: Assume year 1 income of $30,000 needed, and a retirement of 30 years. Further assume a 6% / year investment return. If annual cost increase is 2%, funding needed is $544,000. If 4% increase is assumed, $692,000 is needed. What is that $30,000 / year of a fixed pension worth in net present value assuming 6% discount rate? $438,000. Without doing the math, many initially happy retirees might not be so happy 20-30 years later. And the fact is, with an inexpensive tool, it is easy for even a financial novice to do a pretty decent job of calculating their retirement funding needs. They just have to be realistic about investment returns, life expectancy, and increases in their cost of living (which may be higher than reported inflation). Try out the Not Just for Retirement Calculator to see how easy it can be.