re: the migration from a defined benefit system of our parents and grandparents and the defined contribution plans we now have
We are in a transition phase, with a current messy mix of retirement systems (government vs. private, defined benefits vs. defined contributions, company vs. employee-controlled). Unfortunately, when I look at the numbers, for almost all these plans, the numbers just don't add up. That is, most of these plans are based on over-optimistic assumptions, and it is extremely unlikely that promises will be kept, if current trends continue. We have an entire generation (actually, several generations), who are headed for a brutal reality check.
Item: when Social Security was set up, the retirement age was equal to the average lifespan. Most people worked till they died. Today, most people expect to have decades of retirement to enjoy. Yet most people are not saving anywhere near enough to have any hope of doing that. We are currently in a brief and unsustainable period, where SS beneficiaries take out of the system far more than they put in. Then, inevitably, we will go back to the way it was: most of us will work till we die, just as our great-grandparents did.
Item: Many defined-benefits plans, with many millions of beneficiaries, are woefully underfunded. There are entire industries, where the entire future profit stream of every company, will be insufficient to meet already-promised benefits to current retirees. Which means there is nothing left for stockholders of those companies, and probably nothing left for bondholders, either. This is the hangover from shifting costs into the future, for decades. Look at what's happened to the coal industry, and what is happening to the steel industry. Everyone is going bankrupt, to default on defined-benefits costs. That's the future, for the auto industry, and many others.
Item: The only way to meet retirement goals, in self-directed plans, it to max out IRA and 401K plans, through your entire working life. You've got to start with your first paycheck, and never stop. Yet few people do this. Instead, people assume 10%-20% after-inflation investment returns in their retirement accounts, when the LT historical returns have been more like 5%. Assumptions and expectations are way out of line with reality. |
