In a world where retirement seems ever elusive, what are your expectations and what are you doing to achieve them? Most nations today are coming to grips with the same economic forces: an aging and growing population of seniors, a shrinking workforce in proportion to the number of retirees, slower economic growth, and increased longevity. Retirement policies internationally are beginning to reflect this reality.
Throughout Western Europe, the official retirement age is rising. A few weeks ago, France’s employment minister announced plans to raise the nation’s legal retirement age to 62 (up from age 60), and to increase the number of working years required to claim a pension to 41.5 (up from 40 years). Spain is increasing its retirement age from 65 to 67 by 2013; the Dutch will do the same by 2025. By 2029, Germans will have to work until 67 to claim the government pension, up from age 65. For hopeful retirees, the only way to deal with this demographically-driven dilemma may be to work longer and save more money in a disciplined manner.
David Laibson, a behavioral economist at Harvard, believes education and incentives are surprisingly ineffective ways to get people to do things in their own best interests. He studied the behavior of employees at several large companies, each of which offered a generous match on all contributions to their 401(k) plans. Thousands of workers older than age 59½ were not participating in those plans even though they were leaving money on the table. Workers attended seminars by financial professionals who explained the fundamentals of asset allocation, goal setting, debt, etc. Those workers who attended had volunteered to learn more about their financial situation and, therefore, were somewhat motivated. After the sessions, 100% of the participants said they were going to increase contributions to their 401(k) plans – just 14% actually did so. The solution he suggested is an automatic enrollment plan.
When the default option at one company was participation in the 401(k) plan, and workers had to affirmatively opt out, participation rates grew to nearly 100%. The upfront cost of filling out paperwork and making decisions had been removed from the equation, and a hassle factor cost of opting out had been added to the other side. When the company set the default at putting 2% of the worker’s salary into the plan, almost 100% of the workers made 2% contributions. When the default was raised, the workers passively accepted the contribution of up to 15% with comparable employer matches. Remarkably, the corporate policy had a 97% employee approval rating.
This is not a new concept. Australia has come up with a solution to savings adequacy by making a 9% employer contribution to individual retirement-like plans compulsory. The mandated high rate of savings has had the effect of providing Australians with a much thicker asset cushion than most Americans have. Currently, Congress is working on a draft of automatic Individual Retirement Account (IRA) legislation. Under the proposal, employers with at least 10 employees would be required to offer workers retirement savings options through payroll deductions, and those who don’t sign up would be automatically enrolled in a plan.
Whether you are already contributing to a retirement plan or not, think about setting up your own savings plan. Regardless of your age, an automatic deduction from your checking account each month to an investment of your choice will increase your nest egg in retirement. Avoid the temptation to touch these monies, and set a goal to increase the percentage you save each year. In a world where retirement seems ever elusive, what are your expectations and what are you doing to achieve them?
The Financial Consultants of Upton, Draughon & Bollinger are registered representatives with, and Securities offered through LPL Financial, Member FINRA/SIPC 207 Ansley Blvd., Suite A, Alexandria, LA 71303, (318) 442-4944.
