The days when companies guaranteed their employees a fixed retirement sum have gone. The legislation that introduced the 401(k) was supposed to be ground breaking. These plans are very much down to the individual. Companies contribute up to a maximum as long as their employee saves as well yet the final value of the plan is underwritten by no one. The recession brought the growth of many 401(k)s to a shuddering halt when in the years before it came growth was impressive.
Subsequently the US economy has improved again but national statistics show that far too few people are making plans for retirement and far too many have expensive debt such as that on credit cards. It is a worrying situation especially as the benefits paid out by the Social Security System are wholly inadequate to fund a comfortable life in retirement.
Those who are ignoring the problems they are facing in the future really are unwise at best and downright foolish at worst. In California the state government has a solution; it is going to be compulsory for companies of 5 or more workers to have a pension plan in place. The official title of the scheme is “Secure Choice Retirement Savings Program. Each employee will have 3% of their pay deducted and it will be ‘’invested’’ by the State for a pension when they retire.
Clearly this is unpopular with people who want less government interference, not more yet when you analyse the statistics it surely makes sense to force people into doing something? The record of CalPERS (California Public Employees’ Retirement System) is not great and its performance trails behind the majority of the big public pension funds. The program is union dominated and its future performance is under scrutiny because its past record has been so poor. It was involved in real estate just before the Collateralized Debt Obligation crisis precipitated the recession. While no one was left unscathed by that, CaIPERS lost $11 billion!! The current situation is that there is a considerable shortfall of between the current value of the fund and the benefits it is committed to pay.
California’s action may not be ideal but the figures over the whole of the USA suggest that Americans have too much debt and insufficient to both address any emergency that arises or to fund their retirement. Clearly those in middle age and beyond have a limited amount of time to act. Add to that the fact that expensive credit card debt is widespread then you can see a very worrying scenario.
Expensive Debt Solution
No one is suggesting that the economy does not benefit from domestic spending but the numbers of people taking credit and simply paying the minimum a card company requires each month to comply with terms and conditions are disturbing. As a matter of urgency they need to curb their spending and ideally pay off their debts with a far more competitive interest rate product, a personal loan. Currently they are wasting money which would be far better employed in building up a good retirement fund.
Professional Independent Advice
There is plenty of advice on investing and growing a fund. Some of the professional advice comes at a cost but good growth makes that an acceptable price to pay. It is a matter of being sensible and good advisers are likely to illustrate how an investment can growing at different growth rates. Those rates can never be guaranteed but with interest rates so low money cannot simply be put into deposit products to get growth. It is foolish to take too much risk, especially as you get closer to retirement when there is insufficient time to recover from setbacks. The best thing to do is to have a diversified portfolio and while growth is unlikely to reach double figures it would be a poor fund manager who could not produce a far better return than CaIPERS is achieving.
There is nothing wrong in compulsory saving as such especially in the light of the numbers currently saving nothing at all; it saves them from themselves. The best way forward is to take individual responsibility for your personal future to avoid the potential misery of years of retirement with not the money to fund it.