A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism by John G. Taft

Author:John G. Taft [Taft, John G.]
Language: eng
Format: epub
Publisher: St. Martin's Press
Published: 2015-03-17T00:00:00+00:00

Personal Savings Plans

For individual investors, the self-employed and those who are not covered by an employer-sponsored plan, there are a variety of retirement savings programs. IRAs are the most common, holding an estimated $6.5 trillion in assets at the end of 2013.18 The growth in IRA assets in both absolute and relative terms is staggering. While the overall value of retirement assets has increased, IRAs have grown to represent approximately 28 percent of U.S. total retirement assets as of 2013 compared to 19 percent nearly two decades ago, in 1995.19

The second most common personal savings plan is the Keogh plan, named after its congressional sponsor (the late Representative Eugene Keogh of New York) and principally designed for small-business owners. Keogh plans have higher contribution limits than other qualified plans. However, the plan’s popularity is constrained somewhat by the fact that it entails considerable paperwork to set up, maintain and calculate payouts.

Self-directed retirement plans, whether employer-sponsored or personal savings plans, raise particular challenges. Do the participants have the ability to make asset allocation and specific investment decisions that are neither too conservative nor too risky? Many participants simply do not have the knowledge, interest or time to manage their own retirement assets. And for those at retirement age, further decisions need to be made about how and when to take distributions to avoid outliving their savings.

Decumulation strategies have become ever more critical as a large portion of the population moves into retirement. This was traditionally a period to use less risky investment strategies. However, assuming retirement at age 65 and longevity estimated at 80-plus, many individuals are facing a retirement investment horizon of 15 years or more. As such, an appropriate amount of risk must be taken to hedge longevity risk (i.e., the risk of outliving your savings). As DC plans become the dominant retirement savings vehicle, these risks are often borne by the individual. The dilemma of what to do with savings postretirement is as real and complex as how to save and invest in the accumulation phase.

Reinforcing America’s Retirement Funding Framework

Addressing America’s retirement needs means looking at the issue holistically and reinforcing all three pillars of the retirement system: (1) Social Security, (2) employer sponsored retirement plans, and (3) personal savings.

Pillar I: Social Security

Social Security was originally designed to be a safety net only for those who needed it. If Social Security were to be refashioned to this original purpose, policy makers could increase eligibility requirements and cut benefits, thus reducing Social Security liabilities. While politically controversial, serious consideration must be given to increasing the retirement age for those who are currently far from retirement, as this would more accurately reflect changes in health and longevity. As proposed in President Barack Obama’s 2013 budget, cost-of-living-adjustment (COLA) calculations need to be altered. Additionally, means testing or a benefits cap for those who have other significant sources of income or savings should be considered. Finally, the issue of funding disability income programs from the same source of tax revenue needs to

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.