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Retirement Planning > Saving for Retirement

Forum: Hard Times Open Eyes

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NEW YORK – The recession has had at least had one upside: It’s prompted Americans to save more.

The downturn also has given new life to efforts to help workers prepare better for retirement, according to panelists who appeared here at a forum organized by AXA Equitable Life Insurance Company, New York.

“The financial and economic crisis of the past year will result in significant regulatory reform,” said Pamela Perun, a financial security policy director at the Aspen Institute, Washington. “We want to seize this moment to ensure that savings remains high on the reform agenda. This is a terrific time to ask for a better savings system from Washington.”

The Aspen Institute wants the government to endow every child at birth with $500 in a child savings account.

Child savings accounts would encourage people to establish good savings habits at an early age, Perun said.

The Aspen Institute also has proposed establishing a “home account” system that would help individuals save for a down payment on a home; an “America’s IRA” program aimed at Americans who do not have an employer-sponsored pension plan; and a “Security Plus Annuities” program, which would complement the Social Security program and offer an additional layer of guaranteed lifetime income.

“The way forward in the U.S. must begin with the recognition that we need a savings system that covers all of life–from birth to death,” Perun said. “Our proposals are dynamic: People can, leave and reenter the system throughout their lives and be universally available on a wide scale. These proposals and others like them can help build a better savings system for America and put more Americans on the pathway to greater financial security.”

The Aspen Institute initiatives are needed because the current system of employer-sponsored defined contribution plans is inadequate, Perun said.

Perun noted that 20% of Americans are not saving at all, and that 40% to 60% of the households that do save have little to no exposure to equities. Most of their financial assets are held in fixed-income assets–checking and savings accounts, certificates of deposit and saving bonds.

Americans who have not put any of their retirement assets in equities will not have assets with the necessary growth potential, Perun said.

Although employer-sponsored defined contribution plans play a critical role in “closing the gap in investor behavior,” by providing equity exposure, many workers have no access to defined contribution plans, and others fail to save because they lack financial literacy, Perun said.

Dallas Salisbury, president of the Employee Benefit Research Institute, Washington, agreed that workers who get a late start with funding retirement plans likely will need to invest in stocks or mutual funds.

But individuals who begin saving early and invest consistently should manage adequately without investing in stocks and mutual funds, Salisbury said.

Salisbury noted that he and his wife have built a large nest egg–the funds will, at retirement, replace 100% of their pre-retirement income when supplemented by Social Security–by consistently investing 20% to 25% of their annual income in Treasuries.

Individuals without enough assets to stop working at age 62, when they first become eligible for Social Security, can close the savings gaps by postponing retirement, Salisbury said..

He illustrated by citing a hypothetical couple that would be eligible for $20,000 annually in Social Security benefits starting at age 62. Because of accrual of mortality credits, the benefit would rise to $27,600 if they wait until they are 66 to retire, and it would rise to $38,100 if they wait until they are 70, Salisbury said.

The amount of savings needed to supplement Social Security and provide full replacement of pre-retirement income would be $500,000 with a retirement age of 62; $243,000 with a retirement age of 66; and just $53,000 with a retirement age of 70.

“By choosing to save early, doing comprehensive planning, and timing retirement based on financial resources and needs, people can secure their retirement,” Salisbury said. “And they can do it without equity exposure or public policy changes.”

The panelists agreed the current downturn is having a salutary effect on savings rates, as individuals seek to replenish assets that lost significant value during the credit crisis.

Eric Chaney, AXA’s chief economist, said the boost in personal savings, also will counteract a chief cause of the global recession: The imbalance that grew over the past 20 years between countries that are “big savers” – such as China, Saudi Arabia, Germany and Japan – and countries that are “big spenders.”

In addition to the United States, big spenders include the United Kingdom, India and the countries in southern Europe.

Between 1974 and 2007, Chaney said, the net worth of U.S. consumers enjoyed a “massive increase,” rising to 6.4 times disposable income, from 4.1 times. Over the same period, the personal savings rate declined to “practically zero,” from 8%.

“When financial markets rise, people don’t feel the need to save money,” Chaney said. “Now that the net wealth of U.S. consumers is dramatically reduced, the outlook for the next 10 years is that personal savings will rise because there is a very strong incentive to build wealth by saving the hard way–spending less.”

The personal savings rate in the United States should rise by 8% to 10% over the next 5 to 10 years, Chaney predicted.

Peter Brady, a senior economist with the Investment Company Institute, Washington, said much of the new savings will flow into defined contribution plans.

Despite the beating delivered to stocks and mutual funds during the downturn of the year past, most participants are sticking with their employer-sponsored plans, he said. For 401(k) participants, he said, the one-year retention rate is 95%.

Brady added, however, that profit-sharing plans are integral to retirement savings for only about one-third of older U.S. residents: More than 50% of U.S. residents over age 65 who no longer work derive their primary income from Social Security.


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