Shrinking Nest Egg: What to Do

By Raymond U. Ogums

The events of 2008 have raised awareness to the possibility of highly derailing impact to savings under the new retirement funding structures, due to their relationship with the financial markets. As a result, many retirees were threatened financially; hence, forced back to work. Efforts by federal officials to boost the U.S. economy by lowering interest rates
have resulted in almost zero returns on some federally guaranteed savings accounts popular with retirees. The downward trend continues to bite down seniors incomes, and together with the lingering impact of the 2008 events, have necessitated the need for most retirees to seek income supplements. While many have taken to post-retirement employment as a solution, some others have not been so fortunate in that they cannot work for various reasons. The What to Do part of this book offers suggestions for current and prospective retirees who can or cant work, and those still in their accumulation years, on how to mediate financial shortfall in retirement and ensure that their golden years are golden.

• Language: English
• Publisher: Xlibris US
• Release date: Mar 30, 2012
• ISBN: 9781469187914

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Copyright © 2012 by Raymond U. Ogums.

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Contents

About the Author

Acknowledgments

Introduction

Part I    Living a Satisfying Life in Retirement

1    Where We Are

Impact of the New Retirement Landscape

A Brief History of the US Retirement

2    Retirement Funding Concerns

Individual Planning Practices

Suggestions for Professional Financial Planners

3    Establishing a Satisfying Retirement Life

Determine Your Lifestyle

Determine Your Quality of Life

Satisfying Life and Financial Condition

Determining Financial Requirements

Some Considerations

Other Influences of Satisfying Life at Retirement

Employment as Supplement

Part II    Shrinking Nest Egg

4    Evolution of the Retirement Condition

Changing Economics of the Retirement Funding Structures

Erosion of Employer-Sponsored Benefits

American Spending Behavior

5    Ensuing Consequences

Decreased Savings

Retirement Underfunding

Lower Standard of Living at Retirement

Lifestyle Accommodation

Extension of Retirement Age

Postretirement Employment

Current Thinking about Improvements

Legislative Effects

Part III    Case Study

How We Got to Where We Are

6    Motivators of Postretirement Employment

Income and Savings

Health-Care Benefits and Decreasing Benefits

Mortgage and Household Obligations

Psychological Benefits

7    Inhibitors of Saving

Lavish Spending

Children’s Education and Family

Home Repairs, Spousal Issues, and Loss of Job

8    Methods of Saving

Defined Benefit Plan and Social Security

Defined Contribution Plan 401(k) and Social Security

The Inadequacy of Social Security

Savings, CDs, Bonds, or IRAs

Individual Pension Plans and Other Investments

9    Lifestyle Accommodations

Maintain Planned Lifestyle

Maintain Lifestyle Prior to Retirement

Lifestyle Matches Funding Level

Need to Work

10    Work Attitudes

Enjoy Working

Work Aligns with Planning

Planned to Work

Need or Desire to Work Different from Expectations

What is the Outlook for the Next Twenty Years?

Part IV    Things You Can Do

11    Making Ends Meet in Retirement

Purchase an Annuity

Strive to Get the Most from Your Savings

Adjust Your Attitude for the Better

12    Planning Your Retirement Living    and Lifestyle

What Lifestyle for Your Retirement?

What Wild Cards to Consider

13    Choices of Saving Vehicles    You Can Plan With

Tax-Deferred Versus Non-Tax-Deferred

Individual Retirement Accounts (Traditional IRAs)

Individual Retirement Accounts (Roth IRAs)

Pensions and Benefit Plans

Insurance Plans

Annuities

Social Security

Home Equity—Residential or Commercial

Long—Versus Short-Term Objectives

14    Approach—One Size Does Not Fit All

Option 1: Doing It Yourself

Option 2: Getting Professional Help

What to Look Out For with Option 2

Tax Considerations

Appendix    Research Method and Data Collection

Case Study Research Method

Population, Site, and Sampling Frame

Data Analysis and Technique

Data Analysis and Technique

Glossary

References

ENDNOTES

To my family

About the Author

Raymond U. Ogums has worked for a number of institutional asset-management firms, including Babson Capital Management LLC. He has also served as an adjunct professor at colleges local to the Springfield Massachusetts area, including Western New England University and American International College. His studies have concentrated in financial economics, and he earned a DBA from the University of Phoenix, where his research focused on both the changing proportion of working retirees and the mix of factors that cause retirees to work. He also earned an MBA from Western New England University and graduated a business economics major at the University of New Haven. Dr. Ogums also follows global economic and financial news, and works on finance and investment research for publication in the academic journals.

Acknowledgments

I am gratefully thankful for my children for their understanding during the times I had to isolate myself as I pursued this offering. I am especially thankful to my wife for her support and contributions in the research process. Because some of the case study results presented here were originally published as part of the research for my doctorate learning, I thank the members of my dissertation committee for their input and guidance: Dr. William S. Hettinger, President of the Wyndham Financial Group; Dr. Lee Gremillion, University of Phoenix; and Dr. Brian Sloboda, University of Phoenix.

I most gratefully thank my good friend Kenneth Floryan, an investment professional with broad knowledge on this topic, whose insights and advice helped shape this offering. I also thank my colleagues at Babson Capital Management LLC for their support.

Introduction

Retirement has been redefined, particularly as the first wave of the baby boom generation (those born in 1946) has reached traditional retirement age and has begun entering retirement. Fundamental changes in retirement funding sources, improved health among older people, and increased longevity have rendered many Americans unable to finance over twenty-five years of leisure in later years without reducing their living standards by more than 40 percent. Permanent or one-time retirement in the United States may have come to an end as indicated by the trend toward early retirement among older men.¹

The post-1960s was the era of increasing prosperity and conservative retirement programs in the American society, which allowed older workers to retire on time. Recently, the major sources supporting these programs, social security, defined benefit plans, and savings have changed significantly. Specifically, social security faces a financial shortage by the middle of 2029.² This financial shortage condition can be expected to result in any, or a combination, of the following: reduced benefits, lower rates of replacement, later traditional or early retirement age, including eligibility for benefits, and increases in social security taxes and other government revenues. Defined contribution plans like the 401(k), 403(b), or 457 that carry substantial investment risks are fast replacing the traditional pension plans; and the US National Income and Product Accounts recently reported that savings have decreased to the lowest levels since the Great Depression of the 1930s. As these income sources continue to face reductions and create underfunding of retirement, many older workers in the United States will be faced with two choices: working for more years or enduring a lower standard of living during retirement.¹ While a portion of retirees have always chosen to remain in the labor market for a variety of reasons, the threats posed by the changing economics of the retirement funding structures threaten to change both the proportion of working retirees and the mix of factors that motivate them to work. Some of those factors are presented in the case studies in Part III.

The existence of retirement underfunding, resulting primarily from the changing structures of the retirement funding vehicles and extravagant lifestyle during the accumulation years by many, and the extent to which the underfunding affects retirees is fast becoming a problem. In general, the US retirement accounts savings are expected to experience a shortage of about $400 billion between the years 2020 and 2030.³ American spending habits and lack of financial planning have been reported as the primary reasons for this shortage; and there have been suggestions that baby boomers who are yet to retire should have to make a dramatic change in their savings, spending, and investing habits if they wish to enjoy their retirement.⁴ According to the US Department of Labor, over 70 percent of all workers must now rely on their 401(k) rather than a pension plan. As 401(k)s have grown from covering 7.5 million workers in 1984 to more than 42 million today, its counterpart—the guaranteed defined benefit pension—has gone from covering more than half the workforce to only 35 percent.⁵ The continued shift away from guaranteed defined benefit pension toward 401(k) plans has precluded some Americans who could afford to retire from doing so.⁶ Persistent erosion of employer-sponsored health benefits is also likely to continue,⁷ adding to this problem and creating a condition for lifestyle adjustment by retirees.

Continuing to work has been one method used by people to address this condition, but the erosion of social security and health benefits has resulted in a complexity of factors motivating postretirement employment. These factors undermine how retirees feel about working, further complicating the problem I researched in 2010 using a case study design that an increasing number of people in the United States are financially unprepared for retirement, resulting primarily from the changing structures of the retirement funding vehicles and extravagant lifestyle during the accumulation or working years. The purpose of the case study was to explore attitudes and beliefs toward continued and actual employment behavior among a set of retirees in Hartford County, Connecticut, who have chosen to continue working after reaching retirement age. For the purpose of the study, age sixty-five was designated the retirement age. The results of the case study are presented in Part III.

In this book, I emphasize that spending wisely and making prudent and conservative saving and investment decisions during the accumulation or working years are essential to achieving the desired retirement lifestyle. I also emphasize the embedding of money management strategy at the beginning phase of the retirement planning process as a way to ensure some level of cash flow can be achieved to support desired lifestyle in retirement. The do-it-yourselfers who understand the mechanics of money management strategies should apply it from the get-go. But those who do not understand how to apply money management strategies in their retirement investing should employ the services of a professional retirement planner and make sure they are taught how to track the cash flow in their accounts at every point in time by their professional planner.

If you have a strong interest in how current retirees deal with their mix of saving, spending, income, and working since replacement of the traditional defined benefit pension plan with the defined contribution model, you may want to start with Part III, which provides my case study results. If you are somewhat familiar with the new retirement landscape and want to know more about its impact and funding concerns, you may want to begin with Part I, which also presents historical overview of the US retirement, lifestyle establishment, along with some considerations. You can also skip right to Part IV if you desire to know about what you can do to be able to fund your retirement. Or you may want to scan the glossary which defines the key terms used in the book and flip back and forth as you wish. Whichever sections you prefer to begin your reading with, I have a feeling you will find the entire book interesting.

Part I

Living a Satisfying Life in Retirement

1

Where We Are

Recently, many retirees in the United States have not been able to maintain the lifestyle they planned for their retirement because how they viewed and saved for retirement have been met with one of the most challenging economic and financial climates that has been recorded in history. The new climate has resulted in the redefining of retirement, by current and prospective retirees, to finding the best balance between work and leisure as one maximizes the pursuit of happiness. Even though many Americans, particularly those in the baby boom generation, had always focused on satisfying their immediate needs as opposed to taking time to think about the future, some people did save. Those are the fortunate people with the advantage that the necessity of saving for retirement had been burned into their subconscious by parenting, society, and circumstance so that even during difficult financial times, they continued to make established contributions into their retirement accounts—the type of attitude resulting when retirement contributions are made with forgotten money—money not relied upon for daily needs. However, those accounts were met with the harsh reality of sudden decrease in value (some over 40 percent) following the events of 2008. The condition revealed implications about the relationship of the defined contribution pension plans with the financial markets.

Prior to replacement of the defined benefit pension plan with the defined contribution structure in 1986,¹ employees could expect to fund their retirement living with one employer’s plan, because the employer was contractually liable to benefit payments promised to the employee. Funded completely by employers, defined benefit plans pay fixed amounts to retirees each month based on salary and years of service. Therefore, the employer had the responsibility of ensuring that the amount specified in the defined benefit plan would be paid to each employee at retirement.⁸ The major reasons defined benefit plans are preferred by many are as follows: (a) the schedule (defined) payments continue until death, and in some cases after death, and (b) the benefit does not change regardless of performance levels in the financial or stock markets.

Under the new (defined contribution) model, responsibility for benefit payments has been shifted to the employee from the employer. Only the contributions are defined; the benefit to the member or employee is not. The benefit is determined by the investment decisions of the member and the condition of the financial or stock markets at retirement. As such, the advantage is that there is no limit on the payout. But this provision is also the major reason for earnings fluctuation in the defined contribution accounts; employees are left to choose investment options as they contribute to the plan even though many lack retirement investment knowledge. The employer helps with the input-contribution (usually through matching of funds) but no longer guarantees the benefit or output.⁹ As a result, the possibility of outliving one’s benefits under the defined contribution model looms large.

There are four major differences between the defined benefit and defined contribution plans. First, with regard to plan sponsorship, obligations for the defined contribution plan are fully met with the contributions, whereas future liability is borne in a defined benefit plan. Second, the sponsor of a defined benefit plan bears the investment risk, whereas participants in a defined contribution plan are responsible for balancing risk and return. Third, risks associated with early termination are borne by participants in a defined benefit plan; no early termination risks exist for participants in a defined contribution plan because they own their accounts. Fourth, participants changing jobs can take advantage of the portability offered by defined contribution plans, which does not exist in the defined benefit plans.¹⁰

Impact of the New Retirement Landscape

Up until the 1980s, retirement planning had been based on defined benefit pension, social security benefits, and individual savings or investments. Retirement planners had always advised that the three taken together, rather than relying on one alone, provides a more comfortable retirement. Since the 1980s, many things have changed: defined benefit pensions are on the verge of extinction as they continue to be replaced by the defined contribution plans; employer-sponsored health plans for retirees are disappearing, creating additional expenses for older people not yet eligible for Medicare; social security is under attack and faces changes that will most likely result in less-generous-than-expected benefit payments for many; and congress has announced its decision to change public sector pension age beginning October 2012,¹¹ including pensions saving credit, which may affect decisions in everyone’s retirement planning. Additionally, most retirement accounts lost a lot of value following the financial crisis of 2008. Combined with the current high