Retirement Issues - Essay Example

Retirement Issues Introduction: Life is a culmination of work and leisure along with an optimum balance between the two. Once the age of dependenceis over, every human being is expected to work to earn their living and after certain time they retire and usually pass their life with the accumulated fund and government assistance. Working life is a busy tenure that robs one of his freedoms. Every action during this tenure is subject to availability of miniscule time that is left after work. Work life tension and stress often engulfs the soft qualities of a person and in this era of commoditization almost turns him into a slave. In sharp contrast the retirement life is like setting free a caged bird. All the humdrums of the working life are gone; no more beating the clock and the much awaited freedom to move according to the will, without risking financial solvency. Retirement life might be considered as the time for reaping of the hard sown seeds during the working life. Retirement a word that excites and scare people all at the same time. The thought of retiring brings on excitement because at retirement age people expects to be able to collect their social security, cash in their 401K, look at their savings and be content,relocate to a resort style area where they can own their own home, travel at will, have the option to volunteer just to keep busy, and just relax for the rest of their lives. As reality setin a dark cloud starts to surface over that thought of excitement and leave people fearfulof their retirement. The reality of it is that while living out retirement years people needto be able to support their lifestyle, maybe care for an unexpected dependent, pay formedical care, etc., but with the recession and the possibility of social security not being available in the future, it seems less and less attainable. Courting this situation a peaceful financially solvent retirement life without a well planned retirement plan seems to be the reverie of poor Susan. Thesis Statement: The current article intends to highlight the causes behind retirement plan debacle and its associated impact on the present generations if any. Again the article also extends suggestions to the younger generation on the successful accomplishment of a resilient retirement plan that is expected to get rid of the lacunas of the earlier generations in framing the same. For most of the people it is not possible to work along the entire life. Sooner or later age would take its toll and limit physical movement as well as the thought process. Every person is aware of this fact and tries his level best to secure his lifelong livelihood within the specific time of working life. It is worth remembering Franco Modigliani and Richard Brumberg’s Life Cycle Hypothesis in this regard. The referred hypothesis mentioned of precautionary savings accumulated during the working life tenure as a buffer against unforeseen situation during the retirement life (Froyen, 2003, pp.467-471). However, the term unforeseen itself is stochastic or probabilistic in nature. There is no definite way to measure all unanticipated events that might require added financial assistance and thereby extra precautionary savings. Hence, at the end of the day it is all about series of assumptions and to some extent careful gambling with a hope that the dice would fall in the expected number. If the dice falls otherwise; then all the associated dreams with the retirement life fall into pieces like a glass house stuck with a stone. Hope does not die though, people keep on thinking that their planning considering the retirement life is on the right track and then out of the blue an emergency pops up forcing the individual and his family into the ocean of despair. By the time the individual realizes something is not right in his planning, it is too late. The most ironic thing is that this can happen owing to human error or purely out of accident. This point to the fact that even if one is perfect regarding his retirement planning; he might face the brunt of the unforeseen events similar to anyone else. It is easily understandable now that why retirement plan is important and difficult to optimise. Jane Bennett Clark (2013) in her article “Retirement Setbacks” highlights some of the aspects that are usually associated with people’s retirement plans. Clark illustrates two scenarios; the first one is easy to handle free of any stochastic disturbances, no unexpected medical expenses, no surprises what so ever. In such situation the retirement plan upholds and courting such scenario an individual usually successfully manages his retirement life.The second scenario is exactly opposite of the first one. Here the individual faces rapid unforeseen attack of not so conducive events and are often tempted and even compelled to erode off their retirement saving much earlier or at a much faster pace. If the first scenario is considered as the utopia then the second one must get classified as the dystopia and ironically the second one prevails on the first one in terms of frequency as assured by the statistical figures (Clark, 2013, p.50). Clark (2013) carefully identifies three reasons that are responsible for the debacle of retirement plan. Money does not grow in fields or on trees; to earn money one has to work and when he would not work he can has money only if he has made adequate savings while working. Hence, too little savings as extended by Clark (2013) is one of the main reasons of retirement plan debacle. The benchmark for savings as mentioned by Clark (2013) should be 15% of the present earning each month. But in reality the share usually traps within 6% to 8% and at times even 3%. One cannot hope to sustain his retirement life with that meagre savings if courted with certain emergency that would require added financial assistance on an urgent basis (Clark, 2013, p.50). Clark (2013)also extends a word of caution regarding the timing of savings. According to her, percentage saved would become meaningless unless sustained for a long period. Usually in the initial years of earning people are more prone to spend that to save and this tendency can be dangerous. Ultimately when the necessity of savings is felt then often it is too late to save a meaningful amount as retirement plan and pressure starts to build on the individual. Clark (2013) explains that even with 13% savings of the total earning an individual earning $40,000 per annum who might have started to save at the age of 25 years would accumulate $500,000 by the age of 65 years; a significant and substantial amount of money to pass the rest of the life in peace. In contrast an individual earning $80000 per annum who starts to save at the age of 53 years might find it difficult to manage his living after retirement and should save his earnings at a much higher rate (Clark, 2013, p.50). The common negative notion of people regarding stock market as an alternative savings pocket, especially after the financial crisis and long standing bearish trend in the respective market is another reason as explained by Clark (2013) that common people are getting it tough as far as retirement plan is considered. Clark (2013) explained putting risks aside the stock market can unleash huge potential and financial growth for a person, unmatched by any other means of savings. The trends in stock market are not permanent and it is all about patience, right time to entry and exit that can secure substantial financial benefit to a person. All the financial advisors advises to put lion’s share of the savings in stock market at younger age and reducing it gradually over the years to achieve a 50%-50% balance between fixed income investments and stock market investments by the age of 50 years. Ironically most people panic courting a temporary financial meltdown or bearish stock market and sell off their investments in the stock market at a much lower price than desired. In order to assure a healthy retirement plan that can ensure significant resilience in face of emergency financial needs during the retirement life; faith on stock market and using it to its optimum is of utmost necessity (Clark, 2013, pp.50-52). Clark (2013) has also mentioned that education has become a costly business and lots of sentiments are associated with the same. Even after considering the immense importance of education in child’s life often parents do not accumulate enough funds for the purpose of higher studies of their children and eventually end up by financing it from retirement fund. This is a sort of erosion and considering the volume of fund necessary for this purpose; risk exposure for the retirement plan owing to inevitable but unplanned educational cost of the children is extremely high (Clark, 2013, pp.52-53). Apart from the aforementioned reasons that might negatively affect retirement plan; Clark (2013) also mentions that joblessness and loss of spouse might be classified as the other two reasons that might lead to the debacle of retirement plan. Joblessness even if it is temporary might force an individual to fall back upon his retirement fund to sustain his life. This will readily translate into erosion of the retirement fund. Married couples often depend on each other’s earnings and in absence of one the other might find it hard to meet all the financial needs. The most problematic factor of these two issues is that unlike the other reasons that might fail the retirement plan; these two are stochastic in nature. Job in modern world is highly volatile especially at the time of financial meltdowns and recessions and no one can guarantee that this would not be his last breath. Without any grain of doubt this is sad but true as well (Clark, 2013, p.53). Tacchino (2007) enlists some more interesting points in his article. He states choosing a premature social security age to cut off the free money and in consideration with the breakeven point is often responsible for retirement plan failure. Most people starts taking the benefits of social security at age 62 as they feel paying beyond this age would result in free money. They are also not too optimistic about living beyond 80 years and think claiming the social security earlier would at least ensure that they have enjoyed the same to the optimum level. What they ignore in the process is the waiting benefit of the social security. Claiming social security later would result in larger payment but out of the common notion they ignore that aspect (Tacchino, 2007, p.7). Tacchino (2007) further mentions that choosing a premature retirement age is another reason for the retirement plan failure. Most of the Americans determine their retirement age based on two anchor points. They claim the social security at 62 and Medicare benefit at 65. This is almost like assumptions as it neither takes into account the trade-off between utility and leisure nor the fact that whether the concerned person is ready for retirement. Since, over the time longevity of American people has increased so it is expected that the breakeven point has shifted to at least 70 years. If the person would have worked for 5 more years; pressure on his retirement fund or plan would have been less (Tacchino, 2007, p.8). Very less number of employees belonging to small business units participates in an employment based retirement plan. The small business unit owners are reluctant to participate in any retirement plan for their employees as they believe it would burden them with added cost irrespective of their annual turnover. This in reality has no subsistence as simplified employee pension does not require any mandatory minimum level of participation on behalf of the employers (Tacchino, 2007, p.8). Tacchino (2007) also criticizes the common American notion to stick to his roots out of emotion instead of rationality. During the working life, the kind of shelter one can afford might become hard to maintain after retirement. But the Americans out of their age old habit of aging at the same place passionately refuses to adjust in a new house and locality even if it becomes the need of the time (Tacchino, 2007, p.8). Similar to Clark (2013), Tacchino (2007) has also emphasized the leakage from retirement fund as one of the main reasons of retirement plan debacle. He has stated that mostly such leakages are out of compulsion but exceptions are there “A 25-year-old is considering getting married and he wants tobuy a $5,000 engagement ring. He is in the 28% marginal bracket and he will pay a 10% penalty to take the money from his IRA. He will need to take out $8,064 to buy the ring and pay the taxes [5,000 divided by 1 – tax rate (.38)] He throws caution to the wind and takes out the $8,064. Five thousand dollars goes to buy the ring and $3,064 goes to taxes. Had he kept themoney and earned an 8% rate of return he would have had over $195,000 at 65 for retirement. That’s quite a ring!” (Tacchino, 2007, p.9). Tacchino (2007) has also blamed the sole dependency on Medicare and ignoring long term care insurance as well as Medigap as one of the reason for retirement plan failure. He has opined that considering the high level of medical expenditure that a 65 years old couple might need, high rate of nursing home charges and the uncertainty associated with the chronic illness; it is likely that Medicare alone would fall short of the necessary amount that might be required for old age health care. What have been stated above clearly portrays that retirement plan failure generally happens owing to two sets of problems namely human error and stochastic incidences. Among the human errorovertly satisfaction with the saved amount of money, not giving due importance to savings, delayed savings activities, saving almost nothing even knowing that the concerned person has to finance his child’s education, premature social security claim, premature retirement age determination, remaining beyond the pension net by the small business units, irrational attachment towards the living place, leakage of retirement fund and overdependence on Medicare have been mentioned. Such errors happen due to ignorance and negligence and are easy to address. Stochastic incidence such as joblessness and death of spouse are considered as accident and happen owing to the inherent risk factors of life. It is easily understandable that addressing stochastic incidences are lot harder. Clark has extended valuable suggestions to tame the onslaught of human error and stochastic incidences on the retirement plan. To address the propensity to save less she has suggested maintaining 15% (Clark, 2013, p.50) savings of total earning per month for at least three months and then maintaining the rate at 10% to 12% (Clark, 2013, p.50). She has warned that cutting back savings rate to single digit would be detrimental to the retirement plan. Clark has opined that savings should start at an early age so that fund accumulation can get necessary time. Starting the savings late would put upward pressure on the savings rate and that would definitely translate into cutting off present consumption to a painful level (Clark, 2013, p.50). Clark has also suggested considering stock market as a savings destination. To minimize the associated risks she has advised to buy low and sell high (Clark, 2013, pp.50-52). In order to fund the Kids education Clark has suggested opting for a Roth IRA that would serve both retirement and child’s education. Though she has also warned that taking money out of this particular scheme for child’s education would mean less fund available for retirement benefit; hence people should emphasizes on their savings and keep Roth as it is (Clark, 2013, pp.52-53). As a buffer against job loss one might save at least six months to one year’s expense, opt for health insurance and employer base coverage such as COBRA. State health exchanges would be another buffer and should be operative by now (Clark, 2013, p.53). Opting for single life benefit or double life benefit depending on the situation that a person might face would be a significant protection in case of spouse loss (Clark, 2013, p.53). Apart from these measures people are now opting for parallel jobs to strengthen their earning and fall-back position. It would not be an exaggeration to state that they have realised in present time to ensure a well off future they need to work hard and work more. Though almost every person knows that one day everyone would retire from work and with that they would be subject to uncertainty, yet most of them seem oblivious to this fact. They repeat the same mistake from one generation to other and fall prey to the retirement plan debacle. There is strong statistical evidence in favour of the above fact. People belonging to the age group of 50 to 70 have said that they have at least once encountered an event that might result in retirement plan debacle. The average sum of money lost this way is around $117,000 (Clark, 2013, p.50). A recent survey has revealed that failure to save early has occupied 43.9% share as the threat to retirement savings followed by paying for college (25.1%), health problems (24.6%), job loss (21.9%) and divorce (5.9%)(Clark, 2013, p.52). Dean Robinson’s situation after retirement as explained by Clerk was heart wrenching (Clark, 2013, p.53). It is strange to notice that when it is evident that a parent has to pay for their child’s education why still no adequate measure is taken to ensure the same and why still it manages to pose as a threat. Health problems and job loss raises the same question. One reason for the aforesaid observations might be that an individual is more prone to consumption than to save. Savings does not give any immediate benefit, while consumption increases utility and provides satisfaction with no or minimum possible time lag. A failure to grasp the inherent uncertainty of life regarding job loss, health problems and divorce might be another reason. When everything is going right one seldom give it a thought that it might not always remain the same. Again trusting the common notion; while deciding on retirement plan and ignoring expert’s advice is another major lacuna that is haunting the retirement plans. However, not learning from the past experience must be termed as foolish and irresponsible. One way out of this situation might be a continuous awareness program explaining the necessities and benefits associated with a viable and resilient retirement plan. The necessary actions for the same such as savings rate, savings tenure, option for emergency fund, health insurance, single and double life insurance as well as allocation of education fund for the children should be incorporated in that program. Instead of common notion; expert’s advice should be adhered to. Real life survivors and sufferers might be made a part of such awareness program and they can do a whole lot of good to the audience through motivational speeches and sharing their life experiences. The younger generation should avoid the same heartaches and secure their retirement benefit. As explained earlier means to attain a secure retirement plan are there and considering the fact that the lacunas of the earlier generations regarding their retirement plan have already been identified; this should not be hard to attain. Both Clark’s (2013) and Tacchino’s (2007) propositions regarding the shortcoming of the retirement plan and associated way out have already been discussed. However, another viable way out available to the younger generation might be a phased retirement plan. Under phased retirement plan existing employees are phased out through reduced working hours, reduced working days, seasonal employmentand rehiring after retirement. It has been observed that owing to better life expectancy, educational improvement, automatic operations, increase in willingness to work, uncertainty regarding pension and increase in price level; people are willing to work for a longer tenure nowadays. This tendency is prevalent among baby boomers(Carlson, 2004, pp.18-21; Tacchino, 2013, pp.41-48). Courting this situation adoption of a phased retirement plan might be a win-win situation for both the employers and the employees. This is specifically true for the younger generation as they are the future. A phased retirement plan is win-win situation for both the employer and the employees for several reasons. For the employers under a phased retirement plan they can avail the experienced assistance and supervision of their skilled trusted employees. This is a sort of knowledge transmission and that without incurring the cost of searching and hiring new employees (Carlson, 2004, pp.18-21; Tacchino, 2013, pp.41-48). Again an employer might not be always compelled to provide the retirement benefit to the employees under phased retirement plan. For the employees, they have a backup beside their retirement fund to sustain their rest of the life. The pressure on retirement fund would also be less under phased retirement plan. Furthermore phased retirement plan would provide a feeling of security to the employees and would backup their increased willingness to work (Tacchino, 2013, pp.41-48). Unlike some of the steps that are suggested before; phased retirement plan offers incentive for the employers and the employees alike, hence there should not be any hindrance in its adoption. It does not put pressure on the employees for added and early savings. Nor it forces a reluctant individual to the stock market neither it exposes an individual to the risks of stochastic events. Phased retirement plan seems to be a tailor cut plan for the younger generation full of immense potential(Tacchino, 2013, pp.41-48). In present world more is better; in this ambience picking up the lacunas of the existing retirement plans and addressing them might not be sufficient for the younger generation so that they can get rid of the shortcomings of the earlier generations and attain a secure retirement plan. Need of innovation and adoption in retirement plan is at its cross road. Phased retirement plan suits the scenario perfectly and hopefully would be the way out for the younger generation as far as attaining the secure retirement plan is considered (Tacchino, 2013, pp.41-48). Conclusion: While there are life issues that causes peoples retirement plans to turn to shambles, there is still hope. By identifying the causes, coming to terms with the impact the causes continue to have on people today and by educating the generation of today on how to secure their retirement, retirement can exist for more people. Many people live their lives with the hopes of reaping the rewards and benefits of their many years of hard work and labor once they reach a certain age or have been working for a given number of years. Thus, it is important for people to take the time to educate themselves so that they can avoid or be better prepared for the misfortunes that may potentially affect their retirement plans. References Carlson, R.C. (2004), The New Rules of Retirement, John Wiley & Sons Clark, J.B. (2013), Retirement Setbacks, Kiplingers’ Personal Finance Froyen, R.T. (2008), Macroeconomics, Pearson Prentice Hall Tacchino, J.I. (2013), Will Baby Boomers Phase into Retirement?, Journal of Financial Service Professionals, 67( 3), 41-48 Tachhino, K.B (2013). Planning for a Successful Retirement, Journal of Financial Service Professionals, Editor’s View Read More