Retirement Strategies

A TAG Member sends along a video link about retirement with this factoid attached:

... Half of America's private sector workforce are not covered by any retirement savings plan; their retirement will be anchored only by Social Security and whatever they have managed to save on their own.

The other 50 percent have one of the two main employer-sponsored retirement savings strategies: a traditional lifetime pension or a 401(k)-style investment plan. Today, twice as many workers have 401(k)s than have lifetime pensions, a complete reversal from 25 years ago, according to David Wray of the Profit Sharing/401(k) Council of America. ...

But no worries. Everybody is tucking greenbacks away for their sunset years, right? Just to be on the safe side?

Actually, no.

... About 49% of Americans say they aren't contributing to any retirement plan, according to a new survey conducted by LIMRA, a trade association for the financial services industry. ...

But even for those who are putting money away, there is the question: How much do you put away? And what investments do you place the money into? The writer calling himself "Nisiprius" outlines the challenge succinctly:

1) You must save enough to fund your retirement "needs," however that is defined.

2) The amount you need to save is the same no matter what your asset allocation is. To say "it's very hard to save enough to retire just using Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire just using Treasury bonds and TIPs, you aren't saving enough if you add stocks. You're counting on luck, and luck is not a strategy.

3) Because in the past adding stocks almost never impaired final outcomes much, and often improved them a lot, everyone should hold some stocks.

4) Everyone has a limited risk tolerance, and it is usually lower than people think. When one's risk tolerance is exceeded, one does foolish things that really do impair your final outcome. Therefore, one should not add more stocks than one's risk tolerance allows.

5) The above imply that savings rate is determined by financial considerations alone, independent of allocation choice; and that allocation choice is determined by risk tolerance alone, independent of financial situations. Notice that this is exactly what Adrian Nenu used to post in his rule of thumb, "Equity allocation = twice maximum tolerable risk, but never more than 50%." Incidentally, Charles Jaffe had a throwaway in one of his columns, and I'd love to know the source. He said that a study showed that the average investor sold when his total portfolio had dropped by about 20%. That would imply that stock allocation should not exceed about 40%. ...

For artists, technicians and writers who work under the Animation Guild's jurisdiction for a lengthy period of time, the problem becomes a bit simpler because they have three pension plans at their disposal.

1) Their employer will be putting money into the Motion Picture Industry Pension Plan's Individual Account Plan.

2) Their employer will be making contributions into a Defined Benefit Plan.

3) They (the employee) will have the option of deferring part of their weekly salary into TAG's 401(k) Plan.

All these retirement accounts makes it easier for an Animation Guild member to wade into retirement, but it doesn't make her (or his) sunset years free of challenges. I can say from personal experience that even with retirement accounts, it's a good idea to live below your means and continue to save as much as possible.

Because the future is always unknowable, and so it's wise to build a sizable cushion to protect against hard falls.