We have had it drilled into us to save, save, save from our first job to prepare for retirement. We have also learned that we need to invest that money to make it grow. As we age, though, we have less tolerance for market risk than when we are young. This usually forces investors to reduce their equity exposure as they age. What if we had a way to take on higher risk up until retirement and still have access to our personal savings and investing like a qualified retirement plan (i.e., a 401(k) plan) along with Social Security? That is, could we as a nation replace the notorious third leg of the retirement funding stool? I think we can.
Traditionally, retirement funding was viewed as a three-legged stool: one leg was Social Security, one leg was our own personal savings and investing, and the third leg was a reliable company pension. Our personal savings and investing leg was traditionally the lower percentage of this three-legged stool. Social Security and the company pension were considered the core components and the most reliable. However, these days few companies even offer a pension resulting in workers being forced to rely on the second leg, personal investments, to make-up the difference on a wobbly two-legged retirement stool. Many haven’t done a stellar job without a forced savings component. According to Investopedia.com, as of March 2021 the average 401(k) balance for the age 50 to 59 group, is only $160,000 with slight variances between men and women. Even with Social Security, this is insufficient to carry one through a retirement.
What if we, as a nation, started every citizen off at birth with a $5,000 account that remained 100% in equity until age 60? This is not to replace Social Security, nor personal savings and investment; this is to replace the third leg, a pension, that has been missing from our stool for decades. That is, this citizen equity account would become the new third leg of the retirement stool. And it’s not a gift; it should be paid back! Consider that the average historical stock market return since inception according to NerdWallet is 10%. Others peg it between 10% and 11% but keep in mind this average will likely be lower if you include the S&P 500 index averages.
If we run this number, 10% annual compound growth on $5,000, through Investor.gov with a 2% variance, we get an annual compound return of $1,522,408. At 12% it’s an astounding $4,487,984. Even at 8%, we get a nice, healthy $506,285. Either amount would improve retirement readiness dramatically! Even if we use a public-private relationship where accounts would have an annual fee charged, the retiree still comes out ahead.
I noted these accounts would not be free. As a nation, we could craft program rules like any other retirement scheme. For example, we could make it mandatory that the first distribution is $5,000 (or $5,000 and a percentage of the balance) and is returned to the government to fund further accounts. We could set up payout exceptions for disability or death, and rules for heirs. We could also institute no touch rules on these accounts so that cashing out, borrowing, or otherwise interrupting the growth would absolutely be forbidden. This is truly future retirement income only. This would help alleviate the strain on our safety-net programs if support funds were required to come out of this citizen equity account first. Another possibility would be to institute haircut provisions for those who retire early at say, between ages 55 and 59. Maybe this group would be allowed to access their funds early with the mandatory $5,000 payback plus 1% of account balance. After all, this is extra money, our new third-leg; it’s not intended to replace Social Security or our own private investments.
Pie in the sky? Probably. But if we don’t look for new solutions this retirement underfunding crisis will just get worse. We are already entering an era where we need fewer workers, we can perform more tasks with less people, pensions are all but gone, and many people have to work multiple jobs (most without retirement saving schemes). As technology accelerates, we will still need highly-educated workers, fewer of them, and generally for very specific tasks. These workers will most likely be highly-paid. But what about the millions of gig workers, service workers, part-timers, and others who have no access to a retirement plan and likely don’t have the income to save. A new national scheme would help alleviate poverty, level the retirement savings field, take pressure off of employers, reduce reliance on safety-net programs, and probably other benefits we are as of yet unaware. If workers know that they have a third-leg to their stool, they could keep saving in their retirement plan, but possibly reduce the monthly amount saved from current earnings. This would put money back into the local economy. Employees could still save for their own retirement as much as they like, but they could have the option for more money each month as well. There would be lots of details to work out, but I think we can do it.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you plan for retirement. Contact me and let’s get started on creating some future peace of mind. #talktometuesday #retirement #milliondollars #socialsecurity #save #10% #CFPPro #pandemic #todolist #moneydolist