In late April, the title of an article authored by Joe Nocera, an op-ed columnist of The New York Times, caught my attention: “My faith-based retirement.” Nocera started his article by saying that on the advent of his 60th birthday, he found himself "with a sudden urge to get my house in order — just, you know, in case. Insurance, wills, that sort of thing. Sixty is when you stop pretending you’re going to live forever.”
But even though he wanted to address all things financial, as he admittedly is “officially old,” Nocera reports that the only thing he hasn’t dealt with on his to-do list is his retirement planning. He goes on to report that he began contributing to a tax-deferred retirement account in the early 1980s and his account grew as the bull market soared at that time, giving him an inflated sense of his investing prowess.
Nocera's elation about always positive market returns came to an end with the bursting of the tech bubble in 2000 and the value of his tech-heavy portfolio declining by 50 percent. A divorce several years later cut his 401(k) in half again. Then he bought a home that needed costly renovations. Nocera goes on to say that as his retirement account was so inadequate for his retirement needs, he threw in the towel and withdrew funds from the account for the renovations to the house. Now, close to age 60, except for the divorce part, he lamented that he has made major mistakes with his retirement account.
To write more objectively about his experience and how he plans to have enough on which to retire, he talked with Teresa Ghilarducci, a behavioral economist at The New School. Ghilarducci studies retirement and investor behavior and indicated that Nocera's story was not unique. She told Nocera that even excluding income shocks like divorce or a health crisis that drain retirement accounts, “most human beings lack the skill and emotional wherewithal to be good investors. Linking investing and retirement has turned out to be a recipe for disaster.”
Ghilarducci succinctly summarized the findings of most behavioral economists thusly, “People tend to be overconfident about their own abilities. They tend to focus on the short-term rather than thinking about long-term consequences. And they tend to think that whatever the current trend is will always be the trend. That is why people buy high and sell low.”
The dismal statistics on Americans' preparation for retirement years ratify these statements. Studies done by the Employee Benefit Research Institute point out that only 22 percent of workers age 55 or older have more than $250,000 put away for their retirement. In that same age bracket, 60 percent have less than $100,000 in a retirement account, which apparently is the average savings of Americans nearing retirement.
Another survey completed earlier this year by Bank of America indicates that of the 1,000 Americans sampled who have between $50,000 and $250,000 of investable assets, 57 percent plan to push back retirement age because they can’t afford to retire. Further, more than one-third of those surveyed are having trouble balancing short- and long-term finances and are withdrawing from their retirement accounts to meet their short-term financing needs.
Because of the market meltdown in 2008 and 2009 and the slowing of economic recovery, it is even more critical to contribute as much as possible to retirement plans, budget wisely, and make good investment decisions. By postponing retirement and working longer, Americans have more time to save for their longer life expectancies. In addition, the difference in taking Social Security benefits at age 62 and waiting until age 70 to claim the maximum amount results in a benefit that is 76 percent larger than the age 62 benefit. But to do this, Americans need to have savings to “patch” income needs until the age of 70.
Let’s get back to Nocera. So, what will people do when they retire?
“Their retirement plan is faith-based," according to Ghilarducci. "They have faith that it will somehow work out.”
Nocera was somewhat shocked by this statement and finishes his article by saying that he can continue to write until he expires, as there is “no heavy lifting and no mandatory retirement age.” This may work for Nocera, but for the millions of others who have found out that their original enthusiasm for investing on their own was unwarranted, it might be advisable to get serious about planning for the golden years.
Eddy, CFP, is president of San Diego-based Creative Capital Management Inc. and co-founder of the Family Business Forum at USD. She can be reached at email@example.com. Comments may be published as Letters to the Editor.