The demise of the defined benefit pension plan that began in earnest in the early to mid 1980s, has forced most workers into defined contribution type “retirement” programs. Anyone who has read a small sampling of our posts would know that we felt that trend was devastating and destabilizing for the financial future of America’s retirees. We’ve had a number of data points in the last 20+ years that speak to a variety of issues related to the negative consequences of this development, but this time may just prove to be the worst, as recent activity in the markets has been particularly devastating.
In most other market corrections during the last 40+ years, retirees and those workers that would soon be retiring, benefited from higher interest rates that were available within bond products, and as such, they likely had more fixed income exposure within a diversified portfolio. Regrettably, the Fed’s easy money policies since the Great Financial Crisis have forced many retirees to seek returns and greater yields from riskier products, including bank loans, high yield, lower investment grade corporate bonds, as well as equities. This asset allocation shift was done to try to keep the corpus from being eroded too quickly as plan participants withdrew money to support their living expenses. What is actually did, unfortunately, was to set retirees up for what appears to be a devastating loss. A loss that many retirees will never recover from.
The recent passage of the SECURE Act, which we wrote about in an October 28, 2019 post, titled “SECURE What?” was intended to provide retirees with more cost-effective access to a retirement income stream through annuities. Unfortunately, the combination of falling interest rates and asset values will highlight just how little the “average” American worker has set aside for their retirement when they attempt to transition their meager balances into a monthly income stream. The “American dream” of one day retiring has become a pipe dream for most. We can do better and we must!