Yesterday I posted an item on one of the Motley Fool Rule Your Retirement discussion boards summarizing a provocative Time.com article entitled Why It's Time to Retire the 401(k). I was typically non-committal in my post, and another regular contributor challenged me: Doug, what are you suggesting?
I thought I'd share the gist of my reply here.
Over the past several decades, our culture has begun to face an unprecedented threat on a massive scale — longevity risk. There are several direct and indirect factors:
Voluntary tax-incented savings plans — IRAs, 401(k)s, 403(b)s, 457s etc. — are newer strategies that transfer some the longevity risk to the individual. This shift is accelerating with the gradual decline in the number of companies offering pensions.
Unfortunately, a substantial portion of the population isn't dealing effectively with this transfer. The study of behavioral finance gives some clues why this is so. The average person has a limited ability to defer consumption and save money for future consumption. Most people are primarily focused on the present. That's just the way our brains are wired. Prehistoric humans worried about the next meal, not how they would feed themselves in old age. If they outlived their ability hunt and gather, they relied upon their family for food and shelter. The world now is a much different place, and longevity risk is far greater. But our brains haven't evolved to deal with the change.
The first article I ever wrote for the Motley Fool (Ipod or IRA?) referenced Aesop's fable of the ants and the grasshopper. My sense is that the grasshopper mindset is the dominant one in most people. Many RYR subscribers may have difficultly grasping this fact. Why? Because, let's face it, a subscription to RYR is prima facie evidence of your dominant ant instinct.
Bottom line: I see the IRA, 401(k) and the like as a social experiment of staggering proportions. A few decades from now history will tell us whether these plans generally succeeded or failed. Unfortunately, failure will not be limited to the households living in poverty. It will impact the entire economy. Thus, regardless of our personal values, beliefs and politics, the risk is indeed a shared risk.
In my opinion the evidence so far isn't very encouraging. These voluntary savings plans may work well for us ants. But compared to the grasshoppers we're a distinct minority — more numerous than south paws, but probably not by much.
So what will happen to all those grasshoppers? Maybe Walt Disney had the answer.
This cartoon dates from 1934, the year before the Social Security Act was signed into law.
As regular visitors to this website know, I've been a frequent contributor to the Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.
Like many blogs, my dshort.com website has context-sensitive ads controlled by third parties. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.
