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Discussing Retirement with Parents: Is a Comfortable Retirement No Longer an Option?

Filed in 401k , Financial Planning , Investing 101 , Retirement 14 comments

Yesterday, I had one of the most unpleasant conversations I’ve ever had on the subject of money.

I had to tell a close friend of my family that, in all likelihood, he has not saved enough money for his retirement.

This is a man I’ve known since I was a kid.  The same man who taught me how to turn a 4-6-3 double play is asking me for financial advice, and now I’m telling my little league baseball coach he does not have enough money to retire when he hits the age of 65.

Not exactly a fair trade if you ask me because I felt like an jerk after delivering the hard truth.

The 411 on His Beleaguered 401k

Like most everyone, his retirement account has been hit hard by the downturn in the stock market.  His 401k has lost nearly 50% from it’s maximum value, and because he got a late start saving for retirement, he has been hit with a doubly hard.

His long term outlook isn’t perfect, but it has a few bright spots:

  • He is currently in his late 50s.
  • His 401k total is currently in the mid $80k range, owning 100% stocks.  No bonds.
  • He did not open an IRA to boost tax deferred earning potential.
  • He makes a typical blue collar salary range in the mid 50k range.
  • He has a stable job with little chance of being laid off.
  • He has 4 years remaining on a 30 year mortgage.  No other outstanding debts.
  • He knows nothing about investing and asset allocation.  (This is hardest for me to grasp)

His situation, while difficult for me to discuss since this hits so close to home, suggests that he will likely be forced to delay retirement.  This means he will almost certainly be forced to continue working until he is in his late 60′s, potentially into his 70′s, and perhaps until the day he dies.

I would imagine this is a scenario that many Americans will be facing in the upcoming 10 to 20 years.  Thinking that we saved enough for retirement (some even dreaming of early retirement), only to find out in end that we have come up short when it’s too late.

We’re a nation of spenders, not savers after all.  It’s no longer in our nature to save, much less invest.

If Your 401k is in Trouble, You’re Not Alone

In doing some research for this article, I came across a video from PBS – Frontline asking Can You Afford to Retire?  If you haven’t seen it, and your 401k and/or IRA balance is keeping you up at night, I highly suggest you watch the program.

It’s far and away the best documentary on the subject of poor retirement planning that I’ve seen.

If the statistics aren’t enough to shock you into submission, it should at least help you understand that you’re the only pilot of your retirement funds, and lollygagging (another famous baseball reference) with your 401k account is a very bad idea.

A few brief highlights:

  • 40 million Americans are engaged in a Do It Yourself 401k Program, and have little knowledge how to invest.
  • The top 20% of wage earners have 401k annual returns 5 to 7 times greater than the bottom 20% of wage earners.  In other words, those making the lowest annual salaries saw investment returns in the 4% range, while the highest salaried employees made 20% to 28% on their 401k investment returns.
  • The average 65 year old person on the verge of retirement only has 3 times their current salary.  Experts suggest they need 8 times their pre-retirement salary.
  • The most conservative estimates suggests that a minimum of 14% of your salary should be invested over a 30 year period into your 401k.  The more hawkish retirement planners suggest 15% to 18% of annual salary.
  • The current data from retirement planning experts suggests that 401k plans are not the best method to fund American’s retirement because there are too many choices and decisions to be made.
  • John Bogle, the creator of low cost index funds and founder of The Vanguard Group, describes the underfunding of 401k contributions to be “the next big financial crisis“!  This documentary was filmed in 2006, which is rather creepy, because Bogle’s 401k crisis prediction wasn’t the next financial crisis we faced as a nation (e.g. Bear Market of 2008) but it will certainly be another crisis for us to deal with once the boomers begin to retire with only half of the retirement funds they need to continue their standard of living.

In particular, video segment #3 entitled “Save Yourself” of the Frontline video is the minimum you should watch.  It details the struggles of those who have not saved enough, what the rest of their lives will be like being dependent on social security, and perhaps most importantly, how people in their 50s and younger can salvage their retirement dreams.

How to Seek Help for Your 401k Retirement Account?

I’ve never been the type to depend upon anyone for anything, but here are a few suggestions to get you started on learning how to repair a 401k retirement account using some outside resources, or better yet, prevent such a meltdown from occurring.

  1. Educate yourself.  Documentaries like the Frontline video are an excellent start, but not nearly enough.  Start by reading a newspaper, reading a few personal finance/investing blogs, or watching Jim Cramer’s Mad Money.  Anything that can boost your Investing 101 knowledge is a step in the right direction.
  2. Schedule a meeting with your 401k retirement plan provider.  If you are using an employer sponsored 401k program, you likely have a benefits advisor in your human resources department, as well as a free financial advisor who works for the investment bank (e.g. Fidelity, TIAA CREF, T. Rowe Price, etc.).  Get on the phone with someone who will talk with you, and don’t stop until you get satisfaction.
  3. Contact your IRA management company.  If you can’t get help with your 401k advisors, consider calling the company that holds your traditional IRA / Roth IRA.  I use Vanguard for my Roth IRA, and they were immensely helpful when I was just figuring out the details of my Fidelity 401k plan.  Excellent customer service is hard to find!
  4. Hire a financial advisor.  If you’re desperate for advice, or you just take comfort in paying someone to run your finances, perhaps a professional financial advisor is your best option. If you’re proactive, look into a SIPP pension, but investing and retirement planning is difficult, as well as time consuming, so if you’re not up to the task, perhaps you should begin the search for a fee-only financial planner.

Should We Give Up the Retirement Dream?

Not likely.  I don’t hold such a grim outlook because I still have some faith in the system.  At least, for those who actively work at growing and protecting their retirement funds.

However, the example above is a tragic example of those not stepping up to do the required research, as well as some wishful thinking that has gone horribly wrong.  I think that many people, particularly those in the baby boomer generation (there are always exceptions), have an unfounded belief that somehow everything will turn out for the best or the government will somehow bail us out of trouble.

Yeah right – maybe in fantasy land!

Sadly, we don’t live in this type of a world, and with pension plans going the way of the dinosaurs, I do not see any other methods available other than to educate yourself about the investing world or hire someone to do this for you.

As for my parents, they are in a fairly good situation because they are both state government employees, which means that they will have a decent pension check rolling in once they complete their minimum years of service, or until they choose to retire.

If you find yourself asking if your parents are ready for retirement, irregardless if you know anything about investing or retirement planning, I would still advise you bring up the subject at an appropriate time with a preconceived plan.  At the very least, you can gauge how well they are versed on the subject matter and how much work — and worrying — you should be prepared for.

Photo by StuSeeger

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Posted by CJ   @   12 December 2008 14 comments
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Dec 12, 2008
7:16 am

Not all of us in boomer land are also in fantasy land, nor are we counting on the government (although I better get some SS since I’ve paid in for so long!) As a generation, we have failed to educate ourselves properly in matters of personal finance and that is our fault. (I hope I am an exception!)

How did your long time friend react to the hard truth you brought down on him about his financial future? What is he going to do differently?

Dec 12, 2008
11:02 am
#2 Matt :

@ Mr. TML,

I knew that fantasy land comment would get a comment from you, and you’re right, from our conversations and reading your blog, you are a complete 180 from the person in this example.

It’s not my intent to wrongly classify anyone, but unfortunately, I’m seeing more cases/news reports like this due to poor planning and wishful thinking to those individuals in the 50+ age bracket who are – just now – seeing how their retirement funds stack up.

After hearing my viewpoints, he wasn’t exactly surprised, but there was some obvious deflation in his voice. I could tell he was dejected when I concluded that even a rebound in the market would not help him meet his retirement goals.

His future actions will hopefully follow my suggestions of boosting his tax deferred retirement savings to the max, in both his 401k and by opening a new Roth IRA. I also advised that he educate himself about the market since his investing IQ was far lower than it should be, as well as trying to identify means of generating secondary income since he is a fit and able bodied person (e.g. finding a paying coaching position).

From my estimation, his portfolio was not allocated appropriately to his age, and when the market tanked, he was hit hard. Asset allocation will kill ya if you’re not keeping your eye on the ball.

Dec 15, 2008
10:23 pm
#3 Matt :

@ TStrump

Agreed, I think he should do challenge his financial advisor more. He’s paying for the services after all, might as well get his money’s worth.

I’m also seeing older people have what I call a “it [stock market] will come back” type of mentality. As their investments lose value, their tolerance and patience can be a negative thing in the end.

Dec 19, 2008
1:27 pm
#4 ben :

I am interested in your advice to him about changing his asset allocation. I aggree that all stocks is bad for someone his age, but (re)balancing when the market is so down seems like a bad time to do it?

Dec 19, 2008
1:55 pm
#5 Matt :

@ Ben

You’re correct, it is a bad time to change asset allocation since any move into fixed income would limit his potential to participate in a rebound. In this case, it was really difficult for me to suggest a possible “swing for the fences” scenario by remaining in equities (via mutual funds), but that is what we decided.

Normally, a person of his age should be diversifying into defensive stocks or fixed income as a means of capital protection. Since he didn’t do this, I would argue that remaining in equities after a 50% loss is justifiable.

Thanks for your question.

Dec 19, 2008
9:50 pm

When you recommend for folks to “Educate yourself” I suggest a web site that allows you to practice stock market investing – risk free.

It’s called Wall Street Survivor ( and you get to trade real stocks in real time using fake money.

It’s a great tool for learning how to manage your own retirement money rather than counting on some crook to do it for you.

Dec 19, 2008
10:02 pm
#7 Matt :

@ Mark,

Excellent suggestion, and thanks for commenting.

I’ve got an account at Wall Street Survivor just to play along w/ the 250k contest. I’m using the 3x leveraged ETFs but just haven’t gotten the timing down perfectly yet.

Dec 19, 2008
10:29 pm

I’m Mberger47 at WSS if you want to be buddies:

Which ETF do you like to play? I also use a leveraged ETF to go short the commercial Real estate industry.

Mar 16, 2009
8:05 am
#9 Pinyo :

My parents, both 65, are in very similar situation and they will be working for a while longer. They both start saving very very late and don’t have anywhere near 8 times their pre-retirement income.

Most likely, I’ll be helping them through their retirement.

Mar 16, 2009
3:19 pm
#10 Matt :

@ Pinyo

Yeah I’m sure lots of young adults are in that spot right now. I’m fortunate my parents have a state backed pension plan plus social security in their future. Let’s hope that is enough.

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