Saturday, February 19, 2011

401(k) Retirement Shortfalls

People nearing retirement age are (in many cases) screwed, blued and tatooed.

... The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse. ...

Here's the way things break down in the TAG 401(k) Plan, which covers the bulk of our signator studios:

* 2,225 total participants (active and inactive)

* Average Account Balance -- $58,500

Longtime TAG members working in contract studios have an edge over many. If they have worked approximately twenty years, they will have a monthly annuity coming to them at age 65 in the neighborhood of $1400. On top of that they would have a lump sum out of the Individual Account Plan between $80,000 and $100,000. (Mileage will vary, depending on the number of qualified years in the Motion Picture Industry Pension and Health Plan and the total number of contribution hours.)

So. Let's do some back-of-the-envelope calculations on what a sixty-something TAG animation worker can expect to get after, say, twenty-plus years in the business. (I'll lay out a few other numbers to round out the example.)

* Our TAG vet is getting $1500 per month in MPIPHP monthly pension.

* Our TAG vet is getting $2000 per month in Social Security.

* Our TAG vet has stashed $100K in the 401(k) Plan and has $95K in the IAP (MPIPHP's Individual Account Plan.)

* Our TAG vet has managed to save $320K in various outside investments.

Last set of data points: Our example above has hung it up at age 65; we assume a "safe withdrawal rate" of 4% from the $515,000 nest egg,

So how do all the facts and figures sort out? Our Lucky Ducky will receive a $62,600 per year income to get her (or him) through the sunset years to a final resting place at Forest Lawn.

Now, sixty grand might not seem like one hell of a lot of money, but there are lots of folks across the fruited plain who live on far less. The cold, hard fact is our TAG vet's retirement income is well above the average yearly wage in the good old U.S. of A.

I run around on a daily basis, a bag of 401(k) enrollment books slung over my shoulder, urging TAG members to divert part of their paychecks into the TAG 401(k) Plan. What I find is that a lot of artists in their twenties and thirties don't want to think about saving for retirement because A) they are artists and think visually, not numerically, and B) retirement is way off in some distant and misty future, so they will worry about it later.

Big mistake. To my mind, the most egregious error anybody can make is putting off the deferral of wages into a 401(k) Plan or ROTH IRA. Because the one luxury they won't have when they reach their 40s is time to compound earnings sitting inside investments. Some members tell me: "The 401(k) Plan doesn't have a match, so I'm not interested." They're also making a mistake, because the sheltering of present income is a valuable tool no matter how you slice it, and it's short-sighted not to use the shelter when it's available. (I know lots of artists who jumped into TAG 401(k) Plan when it started in 1995 and now sit atop a quarter million dollars and more, not counting their industry plan accounts. That's sort of useful when you're staring retirement and/or unemployment in the face.)

I keep beating this drum because I have too much first-hand experience with members who haven't planned and haven't saved, and their day-to-day realites aren't pretty. Even if you're unemployed five months of the year, even if you're not making enough to put away 10% of your paycheck, please consider putting away something. Your long-term future will be far rosier if you do.

14 comments:

Floyd Norman said...

What Steve says is so true. Ignor this warning at your own peril.

And, you don't have to stop working. I haven't.

Anonymous said...

Hi All

Here is a another 'financial independence' thought for you. For a moment lets ignore any future pension or social security possibilities and presume you have to save for your own future. For how long do you have to save if you want to maintain the same lifestyle in retirement as you do when working?

To answer this we have to think about how much we spend compared to how much we take home and therefore how much we can save. The spending to
savings ratio is very important. If you spend 100% of the money you take home then you can never stop work. If you spend nothing you never have to work. In between is a great range.

Below is a list of numbers that give a suggestion for how long you need to save based on the % of your take home money that you spend. The savings target is 25 x your current annual spending (4% withdrawal). These numbers presume you start with zero savings and your new investments average a 7% annual return eg stocks, bonds, gold, cash, real estate etc diversification.

spend 100% save 0% = work forever
spend 95% save 5% = 51 years of work
spend 90% save 10% = 40 years of work
spend 85% save 15% = 34 years of work
spend 80% save 20% = 30 years of work
spend 75% save 25% = 26 years of work
spend 70% save 30% = 23.5 years of work
spend 65% save 35 % = 21 years of work
spend 60% save 40 % = 18.5 years of work
spend 55% save 45 % = 16.5 years of work
spend 50% save 50 % = 14.5 years of work
spend 45% save 55 % = 13 years of work
spend 40% save 60 % = 11 years of work
spend 35% save 65 % = 9.5 years of work
spend 30% save 70 % = 8 years of work
spend 25% save 75 % = 6.5 years of work
spend 20% save 80 % = 5 years of work
spend 15% save 85 % = 4 years of work
spend 10% save 90 % = 2.5 years of work
spend 5% save 95 % = 1.5 years of work
spend 0% = Your just here for the free cookies

or put another way if you want to retire at age 65 this will tell you the minimum you MUST save (while living off what is left) presuming you are starting at zero...

current age - minimum % you must save to reach your target
14 - 5% - hey get back in school
25 - 10%
29 - 15%
35 - 20%
39 - 25%
41 - 30%
44 - 35%
46 - 40%
48 - 45%
50 - 50%
52 - 55%
54 - 60%
56 - 65%
if you are older than this then you have a good chance of actually getting some social security :-)

See how starting early is a real advantage thanks to compound interest.

phil mcnally

Steve Hulett said...

Well, yeah.

I guess the alternative to saving anything is working until you bite the dust. That simplifies life considerably.

mark kennedy said...

Great post Steve! I can only add that you're absolutely right and that - -f you're one of those twenty or thirty year olds that hasn't started to take advantage of the union's 401(k) then you ought to do so immediately. I jumped in as soon as I could (back when I was in my twenties) and there are few investments in this world that are easier than this one. It's done well, and even when the stock market has fluctuated wildly, my 401(k) has fared better than similar accounts like my kid's 529 college accounts.

One thing I'd like to hear your take on is how long you think Social Security and our Pension are going to be around. Is it really realistic for people to count on those things being there in the future?

Anonymous said...

According to the CBO, the Social Security Fund is fully solvant for the next 60 years. What needs to stop is the borrowing of these funds to pay for corporate tax breaks. Public funding for private profit.

Steve Hulett said...

Mark:

To answer your good questions:

Social Security is in no danger, contrary to scare-mongering. Ronald Reagan signed reforms into law in 1983 which "front-loaded" Social Security contributions so that Boomers (those born from 1946 to 1964) would pay higher taxes and build a surplus covering the bulk of their received Social Security benefits.

Facts: Social Security has a surplus which will cover beneficiaries until approximately 2037. Thereafter, SS will have enough money to cover 75% of all obligations.

So is Social Security at risk of "insolvency?" Nope.

As for the Motion Picture Industry Pension Plan, its assets currently covers 80% of all projected liabilities (read "payouts to participants.") This figure has bounced up and down over the years, but due to the Pension Reform Act of 2006, Federal Regulations are more stringent and the Plan must send out notices to participants if assets fall below 80% of liabilities. Last year the Plan was at 79% due to invetment declines and the WGA strike of 2008, and notices went out.

To sum up, there will probably be tweaks to SS and MPI Pension Plan in future years, but I don't see either as going away or being at risk. (Obviously, I am not psychic.)

Jason said...

Steve,

Thanks for your post. Could you post a followup on the 401k plan returned funds that have been showing up in the mail the past few years?

I wish that everyone would get on the 'save for retirement train', maybe then the plan would not be failing the discrimination tests...

If you're in the guild and not contributing to the 401k, what is your plan for retirement? Get off the sidelines and start putting in something, choose the Northern Trust Index Fund and leave it on autopilot if you are unsure about investing. An expense ratio of 0.22% means no one will be wasting your money while you educate yourself about the other investment options. Tracking the S&P 500 is a decent play.

The key is to do something or time will pass you by.

Anonymous said...

$1500/mo MPIHPP benefit, retiring today. So what would the approx. MPIHPP figure be in twenty years? The available MPIHPP pension literature for participants does not fairly take inflation into account.

Considering the recent paradigm shift in the economy, the MPIHPP pension will not be the same safety net for those retiring today verses those retiring in 10-20 years. Of course it will be solvent, and 'there will probably be tweaks' at the expense of my own personal solvency in order to keep it so. In the event of an unexpected descent, please put the breathing device on yourself before you put it on your child....

In twenty years, at the current rate of the ever increasing cost of living, a conservative estimate would place a sixty-five year old as having to be supplied with twice the amount of today's benefit, or $3000/mo, to gain an equivalent benefit to those that have come before. And I never get those kinds of figures when I use the MPIHPP benefit calcs. Like the Fed's CPI, they just don't add up.

You are right, no one can know whatever the numbers really will be. But, if there were one point of which I am absolutely sure of, Steve, it would be this. This term pension that you repeatedly insist on using here is a misnomer. Please, I beg you, refer to this at what it really will be - a Supplemental Monthly Allowance to SS.

In this downward economic slide, it is the old who are eating the young. That is the way it often goes in falling empires. And those are the cards that the big fat 'me' generation has left 'me'.

Soylent Green may yet turn out to be my all time favorite movie of your generation.

Anonymous said...

Considering the recent paradigm shift in the economy

I'm betting someone fairly young wrote this. Someone who hasn't lived as an adult though stagflation in the 1970's, the stock market crash of 1987, the California housing bubble and bust of the late 1980's/early 1990's, and many other unexpected economic shifts that come like rain storms in Los Angeles (i.e., they're predictable, but happen rarely enough that each time we act like it's a new thing, and somehow it always seems worse that the last one).

I'm old enough to have been reading doom and gloom articles for many decades, articles that tell us that the current retiring generation is the last that will be able to live reasonably, and that everyone below retirement age is screwed. I'm not suggesting that there aren't real issues, nor that we should blithely pretend we don't need to look hard at our economic system and our own personal finances. I just don't think it's helpful to run around like chicken littles.

Remember that the novel Soylent Green proposed what our world would look like in 1999.

Anonymous said...

I think most Americans would agree that the sky has already fallen and the only people who are trying to put a pretty face on it are the ones in ivory towers. There has not been a panic like we had in 2008 since 1926. You don't have to be older to simply 'know' that. It happened and it was bad, worse than the 70's, 87 and the early 90's. It was the climactic turn of 30 years of denial. It won't EVER be the same for the young, sorry pal.

Anonymous said...

OK, so you can read the future. All the rules of working and saving and investing that we've learned have worked though thick and thin are now completely out the window, and the younger generations will never, ever have a chance to have a decent life. Thanks for settling that.

Like I said, I'm old enough to have been told, repeatedly, that "it won't EVER be the same for your generation" multiple times. Sometimes the sages saying that were hypothesizing that things would never, ever be as good, and other times they were touting a new 'paradigm' that would make everyone wealthy. In every case, the horrible times, and the good times, didn't last. Life went on. Most of those who were frugal, and thoughtful, and worked hard, and saved, ended up doing okay. And most of those who ignored the lessons of the past, and gave up on planning for the future and saving, or tried to get rich quick, didn't do so well.

Every generation imagines that they are living in a world that is completely different than that experienced by anyone else. You can read ancient writings from the Romans that sound just like what we heard in the '60's, and again in the '70's, and again in the '80's, etc., etc.

It's all well and good to count yourself part of a special group, but I suggest that you'd do well to heed the kind of financial advice that people like Steve are offering here.

Anonymous said...

"All the rules of working and saving and investing that we've learned have worked though thick and thin are now completely out the window,...

Yes.

Hmmm, let's see...should I go broke paying for surgeries to extend the average lifespan to 150 years, or eat paste made out of the elderly. Hmmm....

Anonymous said...

Keep reading bad sci-fi, and I'll keep planning for my future using common sense and history as my guide.

Anonymous said...

Yes, use history. Ref. US market, 1929 up through Second World War. But add steroids.

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