This is very true when it comes to retirement and guarantees from annuities.

fg.pngMore than half of the adults polled for a 2016 survey done by TIAA, the main goal of their retirement savings is to provide an income during retirement. Yet when asked if they were considering an annuity – less than half of them said yes. Are you going to risk your retirement future in ‘misinformation’, on something you ‘believe’ to be true or something you heard that is not true? Here are some untruths that are ‘believed’ to be so. There are entities that have a vested interest in keeping you ‘confused’. If having money that lasts the rest of your life is important read on.

1: I will never be able to get my money out of an annuity.

There are different types of annuities, for different needs. The type utilized by most baby boomers today, a Fixed Index Annuity allows anywhere from a 10% ‘penalty free’ withdrawal annually, up to a 100% return of the money you put in… at any time.

2: When I die, the insurance company will keep all my money.

This is another example of the old-school annuity, not the new more effective and flexible type. Though you can still buy this type of annuity, after doing their research 55 and uppers typically find that the new version is better. Any many remaining in the account at death goes to the heirs you designate.

3: Annuities are quite expensive!

Yes, if it is a variable annuity, the fees can be quite high. These are often sold as safe too… and they are not. Again, typically not the best choice for retirees that are looking for principal protection.

Fixed indexed annuities have NO FEES unless you choose the guaranteed income route. These income riders that can guarantee you never run out of money for 1%, sometimes even less. It is important to find out what is true and believe that! Be careful to nut be sucked into paying fees for features or benefits that you don’t really need.

df.png4: If there is an emergency, I cannot get to my money in an annuity.

What we are talking about here is liquidity. I partially addressed the issue of liquidity with the first ‘untruth’. Your account value is always available, subject to the terms. Yes, you might have to pay a penalty if your contract has a 10% ‘free withdrawal and you want 20% in one year. That said, depending on how long you have had the annuity and the growth, you may well be able to get all the money you put in and some, even after paying the penalty. Your money is NOT LOCKED UP.

5: Annuities are just too complicated.

Yeah, it certainly sounds that way, doesn’t it? All financial contracts and explanations are complicated. They are drawn up by attorneys, not only to explain how the investment works but also to protect the institution from lawsuit. Ah, have you ever tried to read a prospectus for the mutual funds you own? It always amazes me that people risk losing half of their money with little or no understanding, but when it comes to contractually guaranteeing ‘they don’t ever lose another penny,’ they freak out. One of those things that make ya say, “huh”? Yes, understanding any surrender fees, crediting strategies, penalties, income riders can be a challenge, but that does not mean they do not work the way they are designed. The guarantees are… ah, GUARANTEED. Even with an income rider, it’s not that hard to understand how they work, if you ask the right questions and have a patient financial professional that understands the value of [you] understanding.

To use another analogy, annuities are like cars – you don’t have to know how all the inner gears, on board computers, energy transmission systems, fuel system, etc. work in order to be able to get safely where you want to go. An annuity can help you get safely to the end of your life with sufficient and ‘certain’ income. Do not let what you think you know keep you from the truth.

Can Annuities Mitigate Inflation Risk?

Inflation has averaged about 3%. That means if you need $5,000 to live on when you retire, you will need $10,000 if you live 25 years. Inflation is the silent [retirement] killer because you never get a statement showing how much spending power you have lost to inflation. Annuities alone cannot protect you from inflation. But it is a big and integral component of a strategy to beat inflation.

rtBy having a foundation of guaranteed, pension-like income as a foundation, you can take more risk with other money for better potential growth. The annuity income ‘foundation’ increases your time horizon on the money at risk and… it provides a base of certainty to live on which prevents you from ever having to spend money that has gone down in value—a BIG NO-NO for retirees!

The ‘risk’ associated with loss is that you might need it to live on and will not be able to wait for the market to return to new highs. Having guaranteed annuity income can decrease or eliminate this loss. This decreases or ‘mitigates’ your exposure. One pile of money cannot provide lifetime guaranteed income, and expect to increase in value at the same time. It would be like expecting a sailboat to also perform as a speed boat. You can have a boat that conserves gas or one that goes fast, but not both. This gets to the heart of our approach, namely, to put yourself in a position of strength by building a foundation of guaranteed income to cover your essential expenses.  Then the rest of your assets can be more aggressively invested, yet your overall risk profile is quite safe.

Wall Street’s solution is to own more bonds as you get older, for safety and income. This is quite risky! When interest rates go up the value of your bonds goes down. That means you LOSE PRINCIPAL in an investment that was sold as safe. Also, if you have that money in bonds, it is not available for growth, which you will need unless you have way more money than you will ever need. If you follow this ‘conventional’ old advice it could very well be at your own peril. Take control of your retirement. Think for yourself. Ask questions. Just because something has been taught for 30 years does not mean that it is right or best.

df.pngConventional advisors tell retirees to avoid annuities due to inflation fears. Of course, that means you must buy bonds from them (hmmm). But, either they do not know or they don’t want you to know that guaranteed income from an annuity really frees up other assets to be invested for growth to keep up with inflation because you do not have the pressures of safety and income on those assets. Income from an annuity is actually a very important part of an optimal inflation protection strategy.

Purpose Adds Life to Retirement

Let’s be real, we tend to ‘want’ to live more when we have a purpose to do so. You need reasons to want to wake up when you retire, reasons to get out of bed.  Researchers from Carleton University in Ottawa, Ontario, and the University of Rochester in New York, tracked the physical and mental health of more than 7,000 American adults ages 20 to 75 for 14 years, and found that those who felt they had a purpose or direction in life outlived those who did not. Being grateful for life will keep you living longer, healthier and happier. E. Christine Moll, PhD, a professor in the department of counseling and human services at Canisius College in Buffalo, New York, and member of the American Counseling Association says having an attitude of gratitude is key, “Be grateful for what you’ve done and where you’ve been, and look forward to more of the same.

saDon’t stagnate! There are so many things to do. I will give you 10 to get you thinking. A no brainer is Join a gym. A survey by Norwegian researchers published in 2011 in Medicine and Science in Sports and Exercise found that exercising at any level is associated with better physical and mental health, especially for older men and women. “If you’re confined to a wheelchair, you can still move your arms or even your eyebrows — that’s like doing exercise,” Moll says. Meet people who have similar interests. You can make dates with your gym buddies and have something ‘new’ to look forward to.

What did you enjoy before you retired? Your hobbies? Do more of what interests you. There’s no reason to stop now, Moll says. You may need to alter your hobbies to fit your physical abilities, but you can and should still do the things you enjoy most. “Adapt what you love to fit what you’re able to do today,” she says. Find new interests too. Retirement doesn’t mean you retire from life, says Elizabeth Lombardo, PhD, a Chicago area psychologist and author of Better Than Perfect: 7 Strategies to Crush Your Inner Critic and Create a Life You Love. “This is an opportunity to try something new — maybe learn a new language or travel somewhere you’ve never been,” she says. Redirect your purpose once you retire to redefine how you spend your time.

There are so, so many. Become Politically Active. You have time to attend city council meetings and share their wisdom and their experience. Consider working on the campaigns of candidates whose views you admire. If you’re unable to go to campaign headquarters, you can volunteer to make phone calls from home. A number of colleges and universities, including Ivy League schools, allow seniors to audit courses at no charge. Learn something you have always wanted to know or know more about. If you’re homebound, you can take courses online. Opportunities to give back and volunteer are almost limitless. The local food pantry or library could likely use your help, and so could area hospitals and nursing homes. Volunteering will get you out and with people of all generations, Kennedy says, and having to be somewhere to do something regularly will keep you feeling needed.

yy.pngEnjoy your local culture. Keeping active intellectually is as important as keeping active physically, Kennedy says. Plan trips to local art galleries, museums, and science centers to learn new things and see what you can recall. Play games. Play whatever you find fun. Find others, neighbors or members of your church or senior center who are interested in what you are interested in. Meet regularly to play. Can’t get together? Play chess or other games online. Play basketball, if you want. Never say never. Ha! Offer your professional skills. Become an emeritus. If you were an accountant before retirement, you might volunteer your services at tax time to help other seniors. If you were a teacher, consider reading to, or recording books for, the visually impaired. You get the idea. Do you enjoy children? You can babysit and help local families with childcare needs. It might even bring in a little extra cash.

Don’t be discouraged if it takes a while. Remember, like anything new, retirement can take a while to hit your stride, find your ‘thing(s)’. As I said, the ideas are many! ENJOY your retirement. After all… it is for the rest of your life.


Will Ten Thousand Monte Carlo Simulations Leave You Short of Money to Live On?

fdOn the surface, Monte Carlo simulations seem to be great illustrative tools for retirees and soon to retirees. A simulation, for example can show how varying spending patterns and varying investment returns are likely to or not to deplete their retirement nest egg.

All too often though it provides ‘false’ security. For starters, it doesn’t consider the sequence of future investment returns has an effect that is at least as important as the ‘average’ of those returns. The result of thousands of iterations Monte Carlo simulators produce can cause clients to believe they’ve considered all the possible financial outcomes they could experience, when in reality the numbers generated may have little relevance to their personal financial situation. Monte Carlo doesn’t measure bear markets well, another potentially BIG PROBLEM. Finally, this type of simulation is not capable of connecting projected investment returns with realistic cash flows.

Relying on Monte Carlo simulations can be dangerous.  The method treats the current market not as a starting point but as merely one of all possible environments. For example, it may predict a 20 percent return because the simulation started at a 7 P/E and then doubled. Problem being it may not be relevant if the current 30 P/E is a 30, you are 70-years-old, and concerned about how your portfolio will be affected over the next 10-to-20 years.

A Monte Carlo simulation might predict 17 loss years out of 77 but is unlikely to put even two loss years in a row, let alone three or four, thus missing the present real world pattern. Nor do random distributions even consider the clients’ and/or advisor’s reactions and decisions to short-term volatilities. Another thing, what value can you put on simulations that look at 77 years when you have 20-30 years left?

To compare reality to the simulations, in one study, an astute advisor created 100 different hypothetical portfolios from 1926 forward, and took varying amounts of income from each. Reality was by far worse! Failure occurred much more frequently than what the Monte Carlo simulations indicated, using the same distributions for income.

Another big issue is that Monte Carlo software makes it easy for the advisor and or person doing the input to raise the odds of success by increasing the amount of common stock in the portfolio. Again, a bad idea when the client really needs to avoid withdrawing portfolio funds in down markets. As I cannot say enough “It is always a mistake to spend money from an account that has gone down in value”. It does not make sense to take more risk because a mathematical error was made in the creation of a model that failed because of the way human nature plays into the whole scenario. The decisions that get made along the way will certainly cause ‘something’ different to happen than what the Monte Carlo model illustrated. These Monte Carlo models do not take human emotions into account. It assumes investors will ride out tough times without backing away from negatively performing investments, something few clients do, something few advisors do.

In fact, Monte Carlo makes it impossible to analyze proposed financial strategies accurately because it treats clients’ assets as separate from their required living expenses. The model assumes, again unrealistically that one never makes an unplanned withdrawal from their portfolios. Really!? Over 30 years, or maybe longer? Not realistic.

Furthermore, Monte Carlo oversimplifies complex financial issues. It does not consider income tax bases in portfolio rebalancing and treats cash flow as a constant, disregarding the devastating effects of large variable expenditures when investment returns go negative.

dffThe truth is that we need to recognize that in planning our future, particularly our financial future, there is a lot of ambiguity, as well as variables including risk and volatility. It is better to be less concerned with the probability of success and more concerned with the consequences of failure. The best way I know to deal with uncertainty is minimize it or even eliminate it. You can do this by creating pension income for yourself using Fixed Index Annuities that contractually guarantee income for the rest of your life. For further reading I recommend Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life by Moshe Milevsky and Alexandra Macqueen.




Don’t be the Retired Frog in the Proverbial Pot of Boiling Water

sdsOur ability to make important financial decisions declines with age. It is better to admit it. Your financial future may depend on it. A study from two Texas Tech professors shows an alarming decrease in financial awareness among Americans of retirement age.

No one wants to admit it but our ability to manage our money decreases as we age, but our confidence does not. It is important to be aware of this.

A study, form by professors Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan from the Department of Personal Financial Planning found our ability to make good financial decisions declines at a consistent rate as we age, and I am not talking in our 80s. The ability to answer basic financial questions decreases in line with the gradual erosion of memory and problem-solving abilities later in life.

Since fewer employers provide pensions than ever before, people are more dependent on their retirement savings coinciding with decreased abilities. What is more concerning, is older respondents didn’t report a loss of confidence in their ability to make financial decisions, a compounding issue.

“This was originally one of the most surprising and alarming findings from the study,” Finke said. “As we get older, our ability to answer basic financial questions that include knowledge, and the ability to apply that knowledge, gets worse. But we have no idea this is happening. It’s very like the research on driving skills. Since it happens so gradually, we’re not aware our abilities are getting worse over time.” It is like the frog put into the pot of room temperature water, warming slowly. He gets cooked before knowing he is in danger of doing so.

sdfgIn “Old Age and the Decline of Financial Literacy,” published in the journal Management Science, the researchers found average financial literacy scores fell by half between the ages of 65 and 85. Characteristics like education, gender and wealth did not matter. They found older Americans were significantly less likely to correctly answer basic life insurance questions.

They report scores on problem-solving and memory can explain the age-related decline in financial literacy, which involves both the ability to remember financial terms and concepts and the ability to process this information. Though it is likely a natural part of aging, don’t minimize the issue.

Decreasing financial literacy opens the door to abuse from less principled advisers, numerous and always new financial scams. as well. Retirees whose financial literacy skills have declined may be particularly vulnerable to the sale of unsuitable investments.

One solution is to make sound decisions while you can. The more income certainty you can put in place that will last for the rest of your life, the less financial decisions you will need to make as you age. Retirement is the ‘spending’ years. The ‘earning’ years are over. Protecting principal and providing income is key.

Retirement Advice For the Young(er) People In Your Life… and YOU.

As they say, with age comes wisdom. Don’t get me wrong, there are moments when I would give up some of the massive amount of wisdom I have gained in exchange for some of the age I have lost. Ha-ha! That said, if I only knew what I know now back when I was 20 or even 30. Back then we think we will live forever. Retirement thoughts rarely crossed my mind. There were plenty other distractions. I could not even imagine being at retirement age. But the funny thing, here I am… 63. Who is that in the mirror looking back at me?

If you know any younger people that will listen, here are some things worth talking about. It’s not all about the money. Yes, we all know subsidizing retirement lifestyle requires savings. But too few consider the importance of preparing beyond finances. What will you do that motivates you to wake up everyday? Who will you be once you are no longer defined by the ‘working/earning’ person you were? How does your spouse see retirement? Are you on the same page? If not, how do you make that work? Without real preparation you risk boredom and dissatisfaction during what should be the best time of your life.

eeOver my 30+ year financial career I have too often see people facing and deciding to cash out 401(k) accounts. With Social Security in question, especially for younger people, the importance of sacrificing a bit today for security later is even more important. Einstein said, “compounding is the eighth wonder of the world”. Look at Investing for beginners to learn more. That means dollars growing moderately over longer periods of time are much more effective than later dollars saved with little time to compound.  “Leave it alone and let it grow” should be your advice to your youngers.

Times have changed significantly, to say the least. Most young people will have multiple jobs over their lifetime. They should be prepared to work at many different companies over their working years. The days of spending an entire career at one place are gone. Understanding the financial realities of retirement are tantamount to providing the motivation to get started NOW! Retirement will not be cheap. Per Fidelity, healthcare costs for the average couple retiring in 2016 will ring in at $260,000 for supplemental insurance. MediCare is not free! Think again.

In retirement you want to do those things you have dreamed of. Realizing those dreams will generally not be cheap either. When budgeting don’t forget to account for those things you have been waiting all your life to do. This is what retirement should be about. Rewarding yourself for the discipline you exercised. Note to your youngers: put those dollars aside now so you can do all you dream of when you finally have the time to do it.

You have one chance to get it right. And since this will be our first time at it, none of us has any real experience being retired. It is possible you may not get everything exactly right but that is OK. Get the big things right and be prepared to be dynamic, to go with the flow. Make changes where necessary, try new things, and don’t be too hard on yourself. There is no deadline to get everything right. So long as you continue to learn as you go you are making progress. Remember there are two sides to a successful retirement; having some money saved and adjusting to a ‘happy’ lifestyle you can afford. Don’t get hung up on, “I don’t have enough”. There is much in life that costs very little. Important and amazing ‘stuff’, helping, loving, walking in a beautiful place, a lovely meal and nice glass of wine… that you prepared. You get the idea.

When I was in my twenties I began a life-long commitment to setting aside time for regular exercise and attempting to eat a decent diet. Tell all the young people you know that good habits now will continue to be good habits later in life. “Use it or lose it,” as they say. Weight training for muscle and bone strength is important. Yoga and stretching for balance and flexibility is huge. Cardio for heart health too! Keeping your brain active may be the most important! The retirement journey will be so much more enjoyable if you are healthy in mind and body.

Make retirement count. It is what we have left. I say, “Bolder not older”!

Your ‘Diversified’ Portfolio of Stocks, Bonds, and Mutual Funds IS NOT SAFE Over the Long Haul.

As a conservative person planning for retirement, here is a lesson you would do well to learn. A lesson from the severe market losses in a year like 2008? First ask yourself, “Will we see another drop like 2008?” Jack Bogle, Founder of Vanguard Funds, the largest index fund company in the world said several years ago, “We are likely to see two drops of as much as 50% in the next ten years”. YIKES! Just one drop anywhere near 50% would devastate most baby boomer’s retirement plan. You may not know it, but all your eggs are in the same basket. The Wall Street basket and all your money is at risk. I call this ‘pixie dust’ diversification’.

gfgI have four brothers. When we were young my Mom would let us each color one dozen Easter eggs for Easter. There were never, ever two eggs alike. They were all diversified. I remember one Easter we put all of our eggs in a basket with some pretend green grass. You know the kind I am talking about. Before we went to church, we put the basket up on the dining table. While we were gone, our dog got up on the table and knocked the basket off and then played with the eggs. He ate some too. Few eggs were salvageable. But wait! All the eggs were diversified. What went wrong? Minor detail, we had a bunch of different eggs all in the same basket. Just like investors in 2008!

If a theory fails its biggest test ever, do you want to use that as your retirement plan? In July of 2009 the editor for Investment Advisor Magazine said, “The wealth management practices of Wall Street firms and big banks are broken.  Again.

To understand this point, it’s important to step back and remember that regardless of which particular investment was the flavor of the month, the common theme heard over and over again in the big investment houses over the past 30 years was that by dividing your assets among many different categories that won’t move in the same direction at the same time, you were going to reduce the overall risk.

This premise seemed to have some validity and was appealing to the average investor – until October 2008, when virtually every category except high quality short and intermediate fixed income investments got caught in the same downward draft.  Put another way, the Wall Street wealth management model failed its biggest test.  Investors who were told that they were diversified suffered losses of double or triple the magnitude of what they were told to expect during a tough year.

What went wrong? The fixed income substitutes pushed by the major investment houses – “low volatility” hedge funds, preferred stocks, asset backed securities or other structured products, closed-end bond funds, income/mortgage REITs, and master limited partnerships – weren’t fixed income substitutes at all.  None of them is a substitute for the most important characteristic that investors should be looking for from the fixed income portion of their portfolios:  safety of principal. Safety of Principal can only be had from putting some of your precious eggs in a different basket. A basket where you can make money when the market goes up, and NEVER LOSE when the market goes down. You must Risk Less to Spend More.

For answers to your question or information on how this applies to you, feel free to get in touch with me at tpenland@greenlineca.com.


Ignore ‘THIS’ and it will be at your own FINANCIAL PERIL.

dssdIn retirement, the sequence of returns is much more important than rates of return. The timing of gains and losses, or ‘sequence of returns,’ as it is referred to, is much more important than the rates of return. During the working years, when you are investing to accumulate money for retirement, gains and losses are anticipated and part of the accepted ‘deal’. But when you retire and begin the de-cumulation or spending down of those assets you saved, a single negative year can create a big problem, if you need some of that money to live on. It can leave you coming up short, sometimes very short… of sufficient money to live on later.

Portfolio risk is compounded or magnified in the years leading up to and throughout the retirement years. Even a small loss of 10% can potentially deplete many years of assets down the road. You save money for retirement so you have money to live on, to spend when you retire. When you spend money that has gone down in value due to market loss, that money is gone forever. You cannot get back the losses. This is what is referred to as Reverse Dollar Cost  Averaging. This is expertly explained by retirement expert Moshe Milevsky in his 6 page whitepaper, Retirement Ruin And The Sequencing Of Returns. It is valuable to read it and understand it. In case you want the short version, here it is.

If you have a 401k at work, you may be familiar with the term Dollar Cost Averaging. For example, let’s assume you set aside $300 a month in your 401k. That $300 goes into your investment strategy no matter what, every month, like clockwork. That means in periods when the market is up, your $300 buys less shares. In periods when the market goes down your $300 buys more shares. The idea being, over time you have a lower average cost of all your investments because you kept buying even when things were going down and were cheap. It can be a reasonable strategy when you are in your 20’s, 30’s, 40’s, and [maybe] even early 50’s to accumulate money over time. Reverse Dollar Cost Averaging is the exact opposite. Now you are taking money out, on a systematic basis, for income to live on and the fluctuations in the market work against you, instead of help you. Imagine you are now 65 and retiring.

Here is an example. You retire at age 65, planning to live to age 90, with $500,000 in saved assets to supplement your social security. You have heard it is OK, and you feel confident spending 4% per year. The market losses 20% in year one and you took out $20,000 (4%) to live on. You have ONLY $380,000 of your $500,000 at the end of year 1. A whopping 24% of your assets are gone and you have 96% of your retirement years left to live. B I G PROBLEM! Taking withdrawals in years that your account is down in value, accelerates the decline.  This puts you on a path where your only options are; continue your withdrawals at an even higher percentage now, because if you need $20,000, it is now 5.26% of the $380,000 you have left. Your only other options are to reduce your income and your lifestyle, or significantly reduce your lifestyle by taking no withdrawals until your money returns to the pre-loss values. This can and has taken 10 years or more in some periods of market turmoil. Not a fun retirement to say the least. By the way, without income guarantees, some experts are now recommending that you take only 2% withdrawals, not 4%. This MorningStar Report suggests a 2.8% rate.

ghghUsing a personal pension instead, created from some portion of your assets, your 401(k) and or IRAs is a much safer, more certain way to set yourself up for success and peace of mind. These are not affected by declining markets because you get a contractual guarantee that provides steady income for life. This gives you confidence because you will not run out of money, you have steady income no matter how long you live, market declines will not decrease that income, and your principal is protected from market losses.

GET BUSY… but only If you want too.

sdsHello Readers. One of the top goals for every 55 and upper that I work with is contentment. Of course, contentment is something different for each of us. When working, we are so busy that it can be unsettling when we retire. Though I enjoy and I am not yet thinking about retirement, I am working on and getting better with having and enjoying unstructured time. It is a work in progress. I am practicing for retirement.

One of the ways I go about it is to create mini structures or smaller projects that can be done in bites and I can still feel like I accomplished something. This helps to keep anxiety down. My soon to be released book is a good example. I stressed a lot about it until I broke in down into doable, bites. Now it is almost ready to publish.

That said, I am just back from a too short and overdue visit with my family in Ohio. Most of it was spent in Amish country, Quaker City where one of my brothers recently purchased a thirty-acre farm. Sooooo many projects, sheeeesh. Two of my other brothers came down with their families as well as a couple of friends.

kjljHow wonderful and enjoyable it was to spend time with everyone, to have good meals, bonfires, ride horses, go on rural country road drives, fish in the creek, and listen to the waterfalling outside the house at night. That said even with all of that we had some mini projects that we could all pitch in and do that my brother could not do alone. We used the 4X4 to help dredge some of the pond (as we swam too), we formed a work line and loaded 3 cords of cut wood into the wood shed for the winter (while we laughed and reminisced) and we cleaned out barn stalls in preparation for animals (made plans for horseback riding in the future). There was comfort and joy in accomplishing these things.

This is just a reminder that retirement is about contentment, whatever that means to you. Having things to get up for, makes us want to get up!!!! That is why I end every financial course or workshop by saying, “If we are able to think when we are on our deathbed, we will not be wishing we had more money. We will likely be thinking about more time. Therefore, retire as soon as you can and make the most out of what can be the best part of your life, retirement”.

Father of the 401(k) has regrets. Rightfully so!

fgdgTed Benna, knew the 401(k) was going to be big, but he states that he never imagined that it would become the primary way people would be accumulating money for retirement. That was never the intention. All was looking good with two bull-market runs in the 1980s and 1990s pushing 401(k) accounts higher. Then two recessions in the 2000s erased those gains and prompted very serious second thoughts from some early 401(k) champions, like Ted Beena.


It is often stated that the 401(k) came about by ‘accident.’ But considering how big Wall Street won when a gazillion baby boomers put trillions of dollars into a poker game they knew nothing about, considering how big the government won by making themselves a partner in the growth of our retirement savings for 30 or more years, I must say, “I don’t believe it!” Think about it, when we had pensions the government did not get a cut of our pension fund growth! But now they do. Yes, approximately 30% of your retirement savings IS NOT YOURS. It is Uncle Sam’s. Their share is called income tax. Yes, our old pension income was also taxable, BUT… they did not share in the growth of that money for all the years we worked.

Ted Beena, in many ways the ‘father’ of the 401(k). He as well as many early backers of the 401(k) say, “The 401(k) was not designed to be a primary retirement tool” and further acknowledges, “we used forecasts that were overly optimistic in order to sell the plan in its early days.” Others say, “the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers.” Beena says, the 401(k) helped open the door even wider, for Wall Street to make even more money than they were already making. In other words, the biggest effect the 401(k) has had is ‘sweetening the pot’ for the real players.

sdsdMany financial experts, those that are not working for Wall Street agree, “it was not a good idea and it is not working well.” The Economic Policy Institute recently declared 401(k)s “a poor substitute” for the defined benefit pension plans workers used to count on, which provided income to live on throughout their retirement years. The fact is, 401(k)s are far less safe than old school pensions because they rise and fall with financial markets. The risk of having enough money to live on is now borne by the retiree. A modern stress most baby boomers would have preferred to avoid. Many Americans are more worried about running out of money more than they are of death.

The retirement revolution began in 1978, when Congress decided to alter the tax code with the Revenue Act. Companies pretty quickly jumped on the band wagon because it was cheaper and it put the brunt of the responsibility on the worker. It was sold pretty hard and employees were attracted to the new strategy for retirement, promoted as a better way. It was touted as a savings vehicle that, they were told, could put them in a better position to retire. Savings, by definition does not include ‘loss’. In reality, the 401(k) was a risk vehicle sold as a savings plan for retirement. Even the employer match you paid for. You worked for it. The 401(k) is still being ‘sold’ as the best way to ‘save’ for retirement. Understanding the difference between saving and risk is HUGE. It is a make or break for many retirees.

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani tells The Journal. “It was oversold.” The harrowing truth is that most retirees have little clue about how to convert their nest egg into income in any efficient and cost effective way. Even scarier than that, neither do many of the financial professionals they are relying on to help.