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The Next Economy

THE NEXT ECONOMY: ESSAY

Retirement Roulette

Saving for retirement used to be as simple as showing up for work. Now it’s rife with contingencies—and success is all on you.

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(Getty Images/Tom Kelley Archive)

These days, William droms can shock people in two different ways. When he’s in his classroom at Georgetown University, the finance professor tells his students how much they’ll need to save on their own, year by year, to retire. Start saving early enough, he says, and you could sock away a million bucks by putting away just 4 percent annually. They’re pretty confident they can do it, he says, until they see how fast inflation eats away at their nest egg.

Outside the classroom, Droms runs a financial-planning firm. Many of his clients lost 40 percent or more in the stock market during the 2008 crash.

 

“You heard of the thousand-yard stare?” Droms asked. “I’d never seen it until some of the people came in and we went through their finances.” What made it worse, he recalled, was telling them that—even after all those losses—the only way they could rebuild their retirement savings was to go right back into the roller-coaster stock market.

It’s part of the American Dream: the ability to relax during your supposed golden years. Maybe your particular dream involves golf or grandkids or skydiving. Any of these requires money—a lot of money. Baby boomers reaching age 65 can now expect, on average, to live another 12 to 15 years, and the members of Gen X and Gen Y likely will live well into their 80s and 90s. To afford a reasonably comfortable lifestyle, by Droms’s calculations, a single person will probably need to have saved up at least $1 million by the time they are 65.

That’s a daunting enough task already. Traditionally, there have been some easy, almost carefree ways to build up that much money. However, thanks to a combination of factors, those options are pretty much gone. To save for retirement, Americans must take on risks that they’ve never faced before. In making sure that we don’t outlive our money, we are essentially on our own.

 

The problem is that there’s no safe-yet-lucrative way to save anymore. The broad stock market has had several epic rallies and nosedives in the past decade, and many experts say that wild swings are here to stay. All the while, inflation will inevitably eat away at the value of people’s savings. What’s more, the safe, fixed-income investments—from bank CDs to government bonds—are paying next to nothing these days. During the past few years, the federal government has tried to alleviate some risk and, in some cases, to save us from temptation.

Ultimately, though, all the pressure to build a nest egg doesn’t rest on an employer’s magnanimity, a financial planner’s shrewdness, or a hotshot broker’s daring. It’s on you. And that may be the riskiest thing of all.

PENSIONS—REMEMBER THOSE?

There are plenty of reasons why saving for retirement has become so much tougher. But for most people, it starts with the fact that, until recently, the need to build your own retirement money was a hypothetical. For decades, tens of millions of Americans assured themselves of a comfortable retirement just by showing up at work. Companies big and small, along with nearly every government employer, offered defined-benefit plans.

After a couple of decades on the job, employees were entitled to a pension, which paid them a set amount of money each year after retiring. That amount was often enough to live on, and if it wasn’t, Social Security took up the slack. For the most part, it was a risk-free way to save. You didn’t have to worry about the stock or bond markets, European debt crises, the price of gold, the yuan-to-dollar exchange rate, or anything else. Your employer saved for you while you worked, and when you retired, money appeared in your mailbox each month; you deposited the check on the way to the golf course.

 

As anyone under age 40 knows, though, pensions are something that your parents talk about wistfully and that you’ll probably never see. For most people in the corporate world, pensions have been replaced by defined-contribution plans to which the company commits a promised amount of money during your working years—but once you leave, that’s it. A 401(k) account, for instance, is a defined-contribution plan. So now, while you spend your 20s through your 60s building a career, getting married, and raising kids, you must also learn how to invest like a pro—watching the stock market, learning what a bond is—all to ensure that you don’t wind up in dire fiscal straits if or when you decide to stop working. Employers may offer “default” options for 401(k) plans—hodgepodge mutual funds—but many of those fared worse during the 2008 financial crisis than the broader stock market did.

As anyone under 40 knows, pensions are something your parents talk about wistfully.

Consider the transformation in progress at General Electric, the 120-year-old-plus company that still ranks sixth among the Fortune 500. Even as GE helped to supply the world with lightbulbs and aircraft engines, it also supplied its workers—starting in 1912—with a retirement plan. If you worked a certain stretch at GE, the company promised to pay you a percentage of your salary after you left. GE set aside tens of billions of dollars to live up to that promise; indeed, the company put aside so much money in the 1970s and 1980s, vastly overfunding its pension plan, that it hasn’t contributed anything to it since 1987. Each year, GE pays a few hundred to several thousand dollars a month, typically, to about 500,000 pension beneficiaries. Retirees were assured of a monthly check for the rest of their lives, amounting possibly to 50 percent or more of their salary, depending on when they retired. If inflation went up, pensions rose to compensate.

This article appears in the December 14, 2011 edition of National Journal Magazine.

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