It is difficult to give a succinct introduction to Teresa Ghilarducci. A labor economist and expert in retirement security, Ghilarducci’s career has included her twenty-five years as a professor of economics at the University of Notre Dame, her two appointments by President Clinton to the Pension Benefit Guaranty Corporatioin advisory board, and her current position as director of the Schwartz Center for Economic Policy Analysis. Dr. Ghilarducci, deeply concerned by the looming retirement crisis, has written How To Retire With Enough Money: And How To Know What Enough Is, a concise, single-sit read of 116 pages.
DIY era of retirement planning: a failure
Retirement in America has a history. The retirement crisis, already in evidence with the number of elderly living in poverty, did not develop without context. Ghilarducci takes a look back to the 1960s until the mid-1990s, a period of time when 75% of full-time American workers retired with a pension plan. Mandatory deductions were made throughout their careers and were supplemented by contributions from employers. The money was invested and managed by professionals, ensuring workers a guaranteed income after retirement.
The 401(k), originally used by high-income earners for a tax break on money set aside for retirement, gained popularity in the late 1990s. Employers found it cheaper to provide 401(k) matching programs than traditional pension plans. Furthermore, risk was shifted from employer to employee. The Do-It-Yourself era of retirement planning had begun and employees armed with all the w4 tools available were taking advantage. It depended upon the employee to:
- voluntarily save
- have sufficient savvy to find low-risk, low-fee investments
- keep his/her head through the ups and downs of the market
Today, “most workers have saved less than $30,000 towards retirement,” says Ghilarducci. The DIY retirement experiment, she asserts, has clearly failed.
Personal responsibility: “it’s up to you”
Ghilarducci walks a fine line when it comes to the question of personal responsibility in retirement planning. On the one hand, she places responsibility upon society as a whole. “Just as our car-dependent society and the availability of cheap sugary and fatty foods contribute to the obesity crisis, so the financial environment contributes to the retirement-security crisis,” she says. “It isn’t the faulty American character that causes us to have less in retirement savings than we need.”
And what is America’s financial environment? Compared with other wealthy nations, says Ghilarducci, the U.S. requires its workers to pay more for medical care, child care, and education. It provides less affordable help for the disabled and elderly, and less access to affordable public transportation. In this environment of high essential expenses, Americans are also the recipients of constant invitations, through superbly effective ad campaigns, to indulge in consumerism. “Asking people to save money in America is like asking them to give up chocolate. Spending – and its partner, credit – is deeply ingrained in American life.”
On the other hand, Ghilarducci does acknowledge that there is more than the larger scene involved in American retirement today. The individual has a role to play too. “It’s actually possible to visit Hershey, Pennsylvania, and not eat chocolate. And it’s possible to live in America and not overspend.” In the same vein, she calls out to the individual to take initiative when it comes to retirement. “The retirement crisis is a national problem, and as it currently stands, the government isn’t close to fixing it. For now, the stark truth is that it’s up to you to pull yourself out of the hole we’re all dug into.”
Social Security in retirement? Not enough
According to Ghilarducci, most people need 70-80% of pre-retirement income to live comfortably post-retirement. Part of that income will be in the form of Social Security, which American workers can start receiving as early as 62 – with a 43% benefit cut – and as late as 70 – for a full benefit.
- Low-income earners (less that $40,000 per year) get 90% of their pre-retirement income.
- Middle-income earners (from $40,000 to $118,500 per year) get 40-50% of their pre-retirement income.
- High-income earners (over $118,500) get 29% of their pre-retirement income.
For most people, those who are middle-income earners, Social Security will not be enough to provide a comfortable retirement. In addition to it, a retirement savings nest-egg is needed – one big enough to provide an income equal to 20-30% of pre-retirement income.
Working in retirement? Risky business
With so few Americans having saved a nest-egg for retirement, many have to pursue employment in their senior years. The irony here is that while high-income earners live longer, are more likely to be welcome in the work place as seniors, and are less likely to need to work in retirement, low-income earners suffer worse health as they age, are more likely to need to work, and often have to accept employment in low-paying retail and service businesses in which age-discrimination is rampant. There are no guarantees when it comes to employment for seniors.
What to do?
Ghilarducci encourages readers of all ages to become proactive about their retirement. “The younger you are when you start saving, the easier the task is, because of the power of compounding. But if you’re older than 45? Older than 50? The road ahead is harder, but the point remains: The best day to start planning and saving for your retirement is today.” What does she advise?
- Downsize now, and start living on 70% of your income.
- Pay off your debts! Including your mortgage.
- Budget and track expenses.
- Take care of your health.
Invest in Retirement Savings (and beware of “the Guy” & fees)
Although Ghilarducci gives a failing grade to the 401(k) DIY retirement effort, she encourages workers who have the option of a matching program at their place of employment to take full advantage of it. For investing in general, she has a word of caution about “the Guy” – or financial planner. “Many Guys are essentially in sales, with a working knowledge of financial terms. Many couldn’t pass a basic financial literacy test.”
Ghilarducci recommends the services of fee-only certified financial planners who charge upfront but offer long-term savings through greatly reduced fees. She also advises passively managed funds rather than actively managed funds. Historically, they do better, and they are less whittled away by fees.
And how much should you personally save? There is no one-size-fits-all strategy, but Ghilarducci offers strategies for a few different scenarios. She also recommends the AARP retirement calculator as well as the variety of financial calculators provided at dinkytown.net .
Teresa Ghilarducci calls upon readers to engage politically to change the financial environment in America. She proposes a replacement of the DIY retirement-through-401(k) trend with a Guaranteed Retirement Account (GRA). The nationally-run program would involve:
- mandatory deductions of 2.5% matched by the employer (for a total 5%)
- hiring professional fiduciaries to invest the money in low-risk, low-fee funds
- a guaranteed 3% rate of return adjusted for inflation
- virtually no early withdrawals
“Most of us are simply not equipped to be pension-fund managers for a pension plan of one,” says Ghilarducci. Her proposed GRA addresses the problems of irregular and insufficient voluntary 401(k) contributions that are the norm in America today, and for those who have no skill in pension-fund management, the GRA would ensure that service at the hands of professionals.
What do you think?
After reading How To Retire With Enough Money, I personally feel a surge of determination to provide my older self with the gift of financial security. Many people who read personal finance blogs are the very ones who have succeeded with what Ghilarducci calls DIY retirement. Some of you started young and will retire early. Others, like me, had a wake-up call mid-life and are now trying to pay off debt and turn things around. Whatever your history of or proficiency with personal finance, we welcome your comments. What do you think? Were traditional pensions better than 401(k) matching programs? Is the GRA a good idea? Are personal finances more dependent upon “financial environment” or the individual? We’d love to hear what your thoughts on how to retire with enough money.