Rethinking retirement plans

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The notion of a traditional, leisurely retirement is fading fast.

The precipitous drop recently in retirement investment accounts, rising health care costs, a dearth of traditional pension plans, faltering Social Security and Medicare systems — and the fact that Americans just are not saving enough — have shattered the hopes of millions of Americans who dreamed of spending their days on a golf course or growing a prize-winning garden.

Instead, retirement is more likely to happen later in our lives and may involve working at least part time. Conclusion: Most of us will probably need a well-defined savings strategy if we expect to retire comfortably.

Most of us have some hurdles to overcome. For starters, we don’t know how much we need to save for retirement. In Bankrate’s retirement poll, 37 percent of Americans admitted they don’t know how much they’ll need to retire, and another 15 percent said they took a wild guess at a number.

Savings are sad

Our savings are paltry, generally speaking. According to the Employee Benefit Research Institute’s 2008 Retirement Confidence Survey, nearly half of Americans (49 percent) have less than $25,000 saved, not including the value of their homes or their pension plans.

But beyond the idea of simply spending less and saving more, other attitudes and outlooks are in for a change.

Take age, for example. When the average life expectancy was 72, retiring at age 65 meant retiring with about 10 percent of your years left. But life expectancy keeps going up — today it’s about 78 years — and if you live to age 85 but retire at 65 you will be counting on your retirement monies to sustain you for more than 23 percent of your life. In other words, if you live to age 78 and want to spend the last 10 percent of your time in retirement, you would not retire until you are 70. Using that 10 percent rule of thumb if you lived to age 85 you would not retire until age 76.

Attitudes already changing

Ironically, the good news is that American attitudes toward retirement savings may have turned a corner — as a result of the bad news all around us. Henry “Bud” Hebeler, author of “Getting Started in a Financially Secure Retirement,” says now that the national attention is focused on the credit crunch, failed mortgages and the souring economy, many of us are starting to ask more questions about saving.

“There’s a wakeup call out there right now and I believe a lot of people will heed it,” he says. “People are going to be much, much more dependent on personal savings in the future.”

Kevin Reardon, a CFP in Brookfield, Wis., adds that baby boomers may be ushering in a new period of austerity where ditching McMansions and SUVs for a downsized lifestyle will have “more to do with our current savings rate than anything else.”

He predicts the future may hold a progression toward more federal programs and higher Social Security payments as well as a spike in households with three generations under one roof.

There is increased chatter about the need to revamp how defined-contribution plans such as 401(k) and 403(b) plans are administered. Employers may have to take a look at the types of retirement plans they’re offering to employees and provide better education about how to choose investments based on individual retirement goals.

A recent survey conducted by Charles Schwab & Co., shows seven of 10 respondents plan to continue working during retirement — 26 percent of those part-time and 40 percent alternating between periods of work and leisure. Only 29 percent of respondents said they never wanted to work again.

Changing automatically

Some changes in the way retirement plans are administered have already been felt. Even before the Pension Protection Act was passed in 2006, many companies had adopted automatic enrollment, in which new employees actually have to take action to opt out of their retirement plan to avoid saving money. An informal poll by in May 2008 found that the auto-enrollment trend continues to grow among companies offering defined contribution plans, with nearly four out of 10 companies participating in the poll now offering this feature — one in five introducing it in 2008 alone.

Studies have shown that automatic enrollment does increase plan participation. For example, prior to automatic enrollment, 26 percent to 43 percent of employees with six months’ tenure at three different companies participated in their respective plan. Under automatic enrollment, 86 percent to 96 percent of employees participated, according to a study cited in a 2007 report on private pensions from the U.S. Government Accountability Office.

Another idea that’s gaining momentum is to increase the default contribution setting on employer-sponsored 401(k) plans.

“The default settings determine to a great extent what people end up doing,” says Stephen Horan, Ph.D., Chartered Financial Analyst, or CFA, and head of private wealth and investor education at the CFA Institute in Virginia. “Suppose you join a company 401(k) plan and they say ‘we’re going to put 5 percent of your salary into a 401(k), but you can change that if you like.’

“Those default settings have a dramatic effect on what people ultimately do,” Horan says. “If the default is zero, participation is far lower than if the default is 5 percent.”

Susan Trammell, a New York-based CFA, predicts the emergence of custom retirement plans that are no longer geared toward how you’re doing against an index fund like the S&P 500. Instead, she envisions plans that take into account your specific situation, where you are in life in terms of time horizon, liquidity needs and so on.

“You’ll have the creation, the bundling and the packaging of products that are really very much tailored toward you,” she predicts. “This may come from people who will understand what your needs are in terms of saving, long-term health care and disability –and you will actually be able to see from month to month where you are in terms of your planned goals.”