Why DB? This is Why!!!

There are people who have argued with me that there is no retirement crisis. Really? There are those that claim that because only about 40% of the private sector had been covered by DB plans at their peak that today’s 14% is no big deal. Really?  Let’s take a look at the latest information from the U.S. Census Bureau, and you tell me that there isn’t a crisis.

While the 401k is one of the “best” available retirement saving options for many workers, only 32% of Americans are currently investing in one, according to the U.S. Census Bureau. That is shocking given the number of employees who have access to one, which is estimated at 59%.

According to a Personal Capital-sponsored study conducted by ORC International, nearly 40% of Americans have saved nothing for retirement and 56% have accumulated less than $10,000. Are they foolish, guilty of consumerism, lazy, etc.? Heck no! In many cases lower- and middle-income Americans just don’t have the financial wherewithal to set aside a portion of their compensation to fund a retirement vehicle. Furthermore, why do we think that it is good policy in the first place to expect a significant majority of our population to become portfolio managers? It is NOT an easy problem for many of us to fund, manage, and then disburse a retirement plan.

Just how bad is the problem?

<25 $4,154.00
25-34 $22,256.00
35-44 $61,631.00
45-54 $116,699.00
55-64 $178,963.00
65+ $196,907.00

*Source: https://pressroom.vanguard.com/nonindexed/How-America-Saves-2017.pdf

These numbers are pitiful especially when one realizes that life expectancy for the average female is 86.6 years, while it is 84.3 for men. When asked how much one should have saved to have a “comfortable” retirement, 40% of Americans indicated that at least $1 million was necessary. Given that the average 65 year-old has accumulated <$200,000, I would suggest that there is a significant shortfall.  Just how are these retirees going to “live” on 5% of their meager balances combined with Social Security, which pays an average of just over $16,000? You barely can live in the Northeast as a homeowner and pay your property taxes with that small savings.

Defined Benefit plans are not perfect, but they are much better for the average American than a defined contribution plan. First, they are professionally managed. Furthermore, one cannot take an early withdrawal or a loan. They can’t stop contributing and benefits are usually paid out on a monthly basis in the form of an annuity. DC plans were NEVER intended to be anyone’s primary retirement vehicle. They were set up to be supplemental retirement vehicles for high earners. Where did we go off course?

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