Last week's issue of Time magazine told the story of Robert Shively, a man who spent his career at Occidental Petroleum - and dreamed of spending his retirement on a golf course.
Unfortunately, Mr. Shively's 401(k) didn't support that dream.
Now he's on the golf course. But he's working as a cart mechanic.
He gets up some days at 4 a.m.
Among his tasks: carrying golf cart batteries, which weigh 84 pounds each.
He's 68 years old.
This isn't how retirement was supposed to be.
Today, at the start of National Save for Retirement Week, I would like to talk with you about how retirement can be.
About how we as a nation can provide what President Obama called for in his inaugural address: "retirement that is dignified."
The President's financial reform plan unveiled in June proposes ways to get more lifetime income into retirement plans, to help Americans enjoy greater financial security in retirement.
Over Labor Day weekend, the President announced additional measures to help Americans save for retirement, such as expanding automatic enrollment and automatic savings provisions, and allowing people to receive their tax refund in the form of savings bonds.
As Frank Keating, the ACLI's President and CEO said, "finding ways to help Americans achieve a secure retirement is one of the more important long-term issues our nation faces….
"While saving is important," he adds, "managing savings to last a lifetime is an often forgotten piece of the retirement plan."1
###
We are now emerging from the worst recession in 70 years.
Last month, the Federal Reserve reported that household wealth in the U.S. increased by $2 trillion in the second quarter - the first increase in almost two years.2
Despite this gain, household net worth is still more than $12 trillion below its pre-recession peak.
This destruction of wealth has cast doubt upon the financial future of millions of Americans.
Our largest generation is on the cusp of retirement. 78 million people. Many of them have not managed their savings to last a lifetime, and were never given the tools to do so.
###
The lesson is clear: America needs a holistic retirement system.
We need a system that helps people save safely while they are working, and then provides an amount of income in retirement that they can't outlive and that is sufficient to their needs - to guarantee the well-being of retirees and their surviving spouses or dependents.
Right now, we don't have a system. We have a patchwork of supplemental accounts and Social Security. And the components are under considerable stress.
The personal savings rate remains near historic lows, despite the recession-related uptick.
The Social Security system faces potential insolvency in the long run; the trust funds will be depleted in about 35 years.
The employer-sponsored system of defined benefit (DB) and defined contribution (DC) plans is under-funded, and does not provide sufficient coverage to about half of the working population.
Moreover, given the preponderance of 401(k) plans, most workers like Mr. Shively now bear substantial funding risk, investment risk and longevity risk.
New research from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) bears this out.
The groups conducted an analysis of their database, representing some 24 million participants, and found that the average 401(k) balance fell more than 30% from 2007 to 2008.
Many observers tend to focus on the severity of the decline; indeed, the percentage is dramatic.
But the account balances themselves are the real concern.
At year-end 2007, the average 401(k) balance was about $65,000. At year-end 2008, the average balance fell to about $45,000.3
Even before the recession, investors simply hadn't saved enough.
The New York Times last week reported that during the economic downturn, about 8% of companies eliminated matching contributions on 401(k)s.
The Times noted that saving for retirement in a 401(k) becomes less attractive and more complicated without employer contributions.
In other words, the situation may get even worse.
That's why we must seize this moment - as the economy shows signs of recovery - to build a retirement system that can help Americans live their retirement years with dignity, and not have to fear running out of money.
Here are five principles that support this goal.
1. Guaranteed lifetime income.
Let's begin with the ultimate objective - guaranteed income to cover housing, food and power throughout retirement.4
In a recent survey of retirees, about half of the respondents (47%) said that they did not receive enough income from Social Security or their defined benefit plans to cover basic living expenses, and were forced to use their savings.5
This is disturbing but should not be surprising. The average monthly Social Security payment, for retired workers, is about $1,160.6 The average monthly spending for individuals over 65 is about $3,044.7
That's a significant gap each month. We can help retirees close it, as ACLI members know quite well.
A holistic retirement system should provide an affordable fixed annuity that guarantees enough income to help meet basic needs. The payout mechanism can include the option to provide monthly income for a surviving spouse or dependent.
2. Full participation and adequate funding.
Second, we must ensure that everyone benefits. In a holistic retirement system, every employee would be eligible immediately and enrolled automatically, on their first day of work.
We must also recognize that to generate sufficient retirement income, we must ensure sufficient savings.
That means we need to increase the current contribution rate, and in some instances double it.
To build sufficient savings, and achieve an income replacement ratio of 70%, contributions in the range of 10% to 14% percent are needed.
To help people save more, the system would also include automatic savings provisions and auto-escalation programs that tie savings increases to salary increases.
3. Broad diversification.
The third principle is diversification to help manage risk.8
A menu of 15 to 20 options is generally adequate and should include a target-date life-cycle fund as the default investment, and a guaranteed annuity option.
Research shows that more than 20 options can actually paralyze investors, or cause them to select funds haphazardly, and construct portfolios that are less diversified.9
Participants should ideally have the ability to invest in asset classes beyond the traditional mix of stock and bond funds and cash investments that make up the majority of today's plans. These include commodities, real estate and private equity.10
4. Education and Advice
I've heard it said that people need education. Certainly, more can be done to improve financial literacy. But what people really need is advice.
Investors need objective, noncommissioned advice to build a diversified portfolio consistent with their goals and risk tolerance.
A recent TIAA-CREF Institute survey11 shows that investors in higher education who are approaching retirement age are focused on assuring an income that can maintain their standard of living. And they're seeking advice.
- Nearly 9 in 10 (87%) said that advice about retirement income strategies is important to them.
- Within the past two years, 60% of respondents have sought out objective retirement planning advice.
Providing a broad range of investment options, along with objective advice, can help facilitate rational investment selection and prudent portfolio construction.
5. Retirement health care savings.
The fifth principle relates to the cost of health care in retirement.
Regardless of your position on the health care debate in Washington, we can all agree that health care is becoming much more expensive.
Over the last 10 years, the cost of health insurance for a family of four has more than doubled.12
Health care spending will account for one-fifth of GDP (20.3%) by 2018.13
Any initiative designed to promote retirement security must therefore give people ways to amass savings they will need for health care expenses.
Without an employer-sponsored health plan, a couple retiring at age 65 today is projected to need between $210,000 and $807,000 to supplement Medicare and cover their out-of-pocket health care expenses during retirement.14
Our clients in the not-for-profit community have told us that they are concerned about this issue, which is why TIAA-CREF introduced a retirement health care savings plan as part of our offering.
More broadly, we as a nation must provide individuals with more opportunities to help meet their retirement health care expenses.
###
I'm often asked about the issue of fiduciary obligation. Some plan sponsors interpret this as providing workers with an account and some choices.
To me, the answer resides in a holistic retirement system that can assure workers will have lifetime income through retirement.
The principles I have just described constitute a system that takes good care of people:
Taking good care means doing more than opening an account for someone. It means doing more than providing them with options to save.
Taking good care means helping participants through 30 years of retirement, not just 30 years of work.
With guarantees. With security. With dignity.
That's how retirement is supposed to be.
The life insurance industry was built to help people through difficult times. And we have an opportunity to lead the way in improving our nation's retirement security.
I'm calling upon you to join with me today to make it happen.
1Statement by Frank Keating. "ACLI Applauds President's Efforts to Help Americans Prepare for Retirement." September 8, 2009. www.acli.org.
2"Flow of Funds Accounts of the United States." Board of Governors of the Federal Reserve System. September 17, 2009. Available via www.federalreserve.gov.
3VanDerhei, Jack, Sarah Holden, and Luis Alonso. "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008." EBRI Issue Brief, no. 335, and ICI Perspective, Vol. 15, no. 2, October 2009. Available via www.ebri.org and www.ici.org.
4Guarantees would be based on the claims-paying ability of the issuing company.
5"What a Difference a Year Makes: A Supplemental Report on the Impact of the 2008-2009 Financial Crisis." 2009 LIMRA, the Society of Actuaries (SOA), and the International Foundation for Retirement Education (InFRE).
6$1,159.50 as of July 2009. Source: www.ssa.gov.
7Bureau of Labor Statistics 2007 Consumer Expenditure Survey. Average annual expenditures for individuals over 65 total $36,530.
8Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
9Crane, Roderick, Michael Heller, and Paul Yakoboski. "Defined Contribution Pension Plans in the Public Sector: A Best Practice Benchmark Analysis." TIAA-CREF Institute. April 2008.
10There are risks associated with investing in securities including loss of principal.
11Yakoboski, Paul J. "Retirement Savers Respond to the Market Meltdown." TIAA-CREF Institute. September 2009.
12Mango, Paul D. and Vivian E. Riefberg. "Three Imperatives for Improving U.S. Health Care." The McKinsey Quarterly. December 2008.
13Centers for Medicare and Medicaid Services (CMS). National Health Expenditures Update, 2009. Available at www.cms.gov.
14Employee Benefit Research Institute (EBRI), June 2009.
TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or www.tiaa-cref.org, for details.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877-518-9161 or log on to www.tiaa-cref.org for a current prospectus that contains this and other information. Please read the prospectus carefully before investing.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
© 2009 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
