Who Will be Responsible for Your Retirement?

Prior to adoption of Social Security in the U.S., many individuals and couples were dependent upon their families and their own personal savings to support themselves in retirement.  Post WWII, family support was mostly replaced by the three-legged stool concept of retirement funding, consisting of Social Security benefits, employer-sponsored defined benefit pension benefits and personal savings.  Over the last thirty years, however, with the advent of 401(k) type defined contribution (DC) plans, declining interest rates and longer lifespans, many defined benefit plans have been terminated by plan sponsors and replaced by DC plans.  Generally, benefits payable from today’s DC plans are lump sum distributions (that may be rolled over to individual retirement accounts), with relatively few DC plans today offering lifetime income distribution options.

With this shift away from employer-provided lifetime income benefits, more responsibility for managing retirement has been placed on individuals.   More and more individuals and couples are now expected to invest their retirement assets and manage their spending in retirement to make their assets last.  Some households hire financial advisors to help guide them with their increased retirement responsibilities. 

Managing one’s retirement can be a complex task.  Many retirement experts believe that, in general, people don’t have the necessary education to navigate the many retirement risks that households face.  They believe that either the government or employers (or both) should take various actions to try to help people make better retirement decisions.  
 
Recently, there have been several proposals encouraging plan sponsors to include additional distribution options in their DC plans to help workers manage their retirement risks.  For example, in his Forbes article entitled “How Your Employer Can Help Your Retirement”, actuary Steve Vernon promotes the Spend Safely in Retirement Strategy set forth in reports jointly released by the Stanford Center on Longevity and the Society of Actuaries.  In his article he says,
 

“Wondering if you have enough savings in your 401(k) and IRA to retire comfortably? Confused about the best way to deploy your savings in retirement so you don’t outlive your money? These are critical retirement planning decisions for most older workers who are approaching their retirement years. 

The trouble is, the majority of older workers are on their own to address these two tough questions. Many 401(k) plans require you to be your own actuary and your own investment manager when managing your account. But most people don’t have the background or training to make these complex decisions.”
 

Rather than encouraging individuals to obtain the background necessary to make better retirement decisions, Mr. Vernon suggests that you should, “tactfully ask your employer if they’re considering implementing a retirement income menu and, if not, to please do so.”

In July of this year, a group from the Retirement Security Project at Brookings released their proposal for a default decumulation solution from defined contribution plans.  As with default investment options available today in many plans, this decumulation default option would apply unless a plan participant elected a different option.  According to the Brookings group, default decumulation options are needed in DC plans because, “Experience has demonstrated that most new retirees who are handed a lump sum are ill equipped to understand and successfully navigate the many complex risks, tradeoffs, and necessary decisions.”

We have absolutely no problem with including lifetime income options in DC plans, either as another distribution option or as a default decumulation option.   We do believe, however, that with a little bit of education, many individuals could become better equipped to make reasonable retirement decisions.  It is for this reason that we encourage people in this website to think like an actuary when it comes to their retirement.  If you fail to learn how to properly manage your spending and investing, and you are relying on the government, your employer or even your financial advisor to make these and other important retirement-related decisions for you, we believe that you are increasing the risks of needing support from your family or needing to reduce your living standards (or both) during retirement.
 
The Merriam-Webster dictionary defines “ken” as “the range of perception, understanding or knowledge.”  As noted above, many retirement experts believe that managing one’s retirement today is beyond the ken of most individuals.  In this website, we provide relatively simple Excel workbooks and proven actuarial processes to help you:

• calculate the present values necessary to develop a reasonable spending budget,
• adjust that spending budget from year to year,
• stress test your assumptions, and
• develop an investment strategy designed to fund your future essential and discretionary expenses in retirement. 

So, we encourage you to take responsibility for your own retirement by trying out our workbooks and processes.  We believe that doing so will give you the ken (and the Bobbie) to enable you to “be your own actuary” and to make better financial decisions.