Where Does the Time Go?

Members need CUs’ help with retirement planning.

August 13, 2013

As we know, retirement funding should be part of everyone’s financial plan from the very beginning of one’s career. I recently discovered an interesting book, “Are You a Stock or a Bond,” by Moshe A Milevsky, which suggests that an important consideration in such plans, sometimes overlooked, is that of human capital.

Human capital is the potential future value of earnings based on your career. If you have a consistent paycheck with steady earnings—say you work as a tenured professor—you are a bond. Few surprises with income mean you might invest retirement funds more heavily in stocks.

But those whose career earnings are less predictable—say, someone who is compensated via bonuses, stock options, or prize winnings—might invest more heavily in bonds.

“The single most precious asset on your personal financial balance sheet is not your savings account, your investment portfolio, your jewelry, or even your house,” says Milevsky. “Rather, it is the discounted value of all the salary, wages, and income you will earn over the course of your working life. This asset is called human capital… It’s the best asset you have until well into your middle age.”

Further, “The bottom line is that you must protect both your human and financial capital. Diversification, life insurance, annuities, and some debt can all help you achieve your goals. But before you take any course of action you must first ask, are you a stock or a bond?”

Research findings unearth much this week on various retirement issues. As you consider these trends, realities, and possibilities for yourself and your members, keep in mind the oft-overlooked but important variable of human capital in retirement planning.

Time is money

Gen Xers face unique financial and retirement planning challenges, according to “The Plight of the Gen Xer.” This group struggles “more than any other group when it comes to juggling competing financial priorities related to their homes, children and parents.”

Compounding these realities is the fact that Xers have also dealt with an economy that has depleted assets, and are the hardest hit by the mortgage crisis.

Consequently, many Xers have had to dip into retirement funds to make ends meet, jeopardizing a comfortable retirement.

“The best and only real way to help them out of this extremely tough time… is to lead them toward those higher-responsibility, higher-salaried positions,” the article claims. “That eventual advancement is the only thing that will turn Gen-Xers’ present financial troubles around.”

Generation X is not the only group struggling, however. Many employees are not participating in workplace retirement plans, as only “5% of businesses with one to four employees offer a workplace retirement savings plan,” according to MarketWatch. In addition, only “18% of firms with five to 11 employees, 26% of businesses with 12 to 25 workers, and 31% of businesses with 26 to 100 workers sponsor a workplace retirement plan.”

Offering a 401(k) plan doesn’t ensure participation. MarketWatch reports that 9% of workers at businesses with 100 or fewer employees that offered a workplace plan choose not to participate.

Reasons for lack of retirement plans at small businesses include small interest among workers, plan start-up costs, challenges in choosing options, and potential liability issues.

Further analysis of retirement plan coverage for workers is found in a study by the National Institute on Retirement Security, “The Retirement Savings Crisis: Is It Worse than We Think?”  Here we learn, “Americans are highly anxious about their retirement security,” as pension plans disappear and workers take on more personal risk in financial planning for retirement.

This report, which explores retirement readiness for working-age households, presents these key findings:

You can’t take it with you

Those who have reached retirement age are beyond the worries of making plans, and instead must deal with their financial circumstances.

For some, there’s concern about dipping into hard-earned nest eggs. “Retiree Paralysis: Can I Spend My Money?” reports that people fear money will run out, and “the decision about how much to spend, and how fast to spend it, is one of the most complex financial decisions an individual will make. It requires people who were lucky enough or diligent enough to save to suddenly juggle complex math and countless variables.”

Required minimum distribution (RMD) strategies can provide helpful guidelines for seniors. Percentages of withdrawals suggested with RMDs “are applied annually to the investment portfolio’s current market value.”

Reverse mortgages are options for some looking to help fund retirement, but they’re not a terribly popular choice, according to Boston College. “Reverse mortgages are unpopular despite historically low interest rates that make them a good deal… AARP has estimated that only 1% of older Americans use them.”

Reasons for this include the housing crisis, which zapped home values and equity; “less generous federal standards for determining loan size,” and negative public relations about some problem loans. AARP further claims “some seniors don’t trust them or are unwilling to pay the fees involved.”

Still, reverse mortgages remain a viable option for those willing to investigate this possible source of retirement funds.

Finally, some older Americans just keep on working. These individuals are in the minority, but the percentage of older people in the workforce is growing, and “The earnings of U.S. workers in their 60s and 70s are rising faster than for people in their prime working years,” says a Squared Away Blog post.

The increased rate of pay credited to these workers compared to those of years past is due to more education and gains in productivity of older workers.

“Retirement: It’s nice to get out of the rat race but you have to learn to get along with less cheese,” noted comedy writer Gene Perret. Transition to retirement is one of life’s moments that can be more or less difficult depending on plans made and implemented from early on.

How can you help your members stock their retirement larders to keep out of money traps?






Lora Bray is a research librarian at CUNA.