We know how important it is for everyone to save for retirement: 67 percent of working Americans have no retirement plan. There are far too many, too young and too old, who are on the hook. But while the federal government spends billions of dollars a year ensuring people have enough to last in retirement, practically nobody seems to be prepared.
Why not? It’s basic economics: A savings habit is more effective than a handout, and an effective savings habit is good for the economy in the long run.
In essence, there are four things that need to be changed if we are going to overhaul how we start saving for retirement.
• Taxes for Saving: If you are serious about saving, avoid holding any investments that are subject to a capital gains tax, for instance. So, if you expect to retire with an income of, say, $50,000 a year, you can’t afford to hold investments that could immediately transform from a capital gain to a tax hit. The recent high tax rates on investment gains weren’t conducive to building a nest egg, so why do it now?
• Retirement Accounts and 401ks: Investors should be able to accumulate a substantial amount of money throughout their working lives, before coming to retirement, without getting charged a bunch of fees or paying sales charges to manage their account. Workers at the few companies that offer 401ks shouldn’t pay any sales commissions, but if they get a job that doesn’t offer the opportunity to save a lot of money, they should be free to invest. And, let’s face it, if anyone is going to put money into a company’s 401k account, they deserve to be able to minimize fees and sales charges.
• Intergenerational Cohabitation: If you are lucky enough to live together into retirement, you should be responsible for managing any mutual funds and mutual fund investments that you hold in the plan. That means you should pay no sales commissions, but I am unclear if there are anything like that available.
• Investment Strategies and Time Limits: I’ve seen some creative retirement planning — wonderful, if expensive — strategies that include putting your money into gold, gold mining and art. People have been writing these book on gold for decades, but many have failed to generate the right kinds of returns. I’ve even seen retirement plans where funds were invested in commercial real estate, only to give up when the value of the properties took a hit.
It doesn’t have to be like this. Anyone who is serious about retirement planning can — and should — figure out how much income they can safely withdraw each year, plus their medical expenses in retirement. Then it’s on you to figure out what to do with the other part of your money, something difficult enough to do when you are 50-something, but impossible in the early retirement years. (And, yes, I know that 50 is the magic number when all else fails, and there are others that can work.) That shouldn’t be harder than figuring out how to do most other aspects of investing.
Rethinking retirement means changing the way many people save. And, of course, there is the shock of losing — or working longer than planned. The question is whether anyone cares to try.