I was at the NAPA/ASPPA 401(k) Summit earlier this month when a weather pattern emerged that threatened both my connecting flight and my arrival back home. Alerted to the potential problem the afternoon before I was scheduled to speak, I began seeking alternatives. Eventually, I was able to reroute my connecting flight away from Chicago, where the storm was due to strike first — though doing so meant a later arrival at my home airport and, based on the trajectory of the storm, that later arrival increased the likelihood of running into problems there.
I continued to check in back home during the day — trying to gauge the storm’s progress and (re)evaluate my alternatives. As I boarded that final leg of the trip home that afternoon, I knew a couple of things: The flight was (still) departing on time; my connecting point wasn’t in the path of any storm; and while it wasn’t snowing at home (yet), the forecast was for more snow there, starting later.
The trip home wasn’t exactly restful (despite the hour), but having done what I could to minimize the impact of the storm on my travel and attended to the things I could control, I boarded, hopeful that the combination of my new route home, the pilot’s skill, the storm’s track, and just a little bit of luck, would result in a satisfactory, if somewhat stressful, conclusion.
Earlier this year EBRI was approached by Money magazine to use the EBRI Retirement Security Projection Model® (RSPM) [1. The RSPM grew out of a multi-year project to analyze the future economic well-being of the retired population at the state level. After conducting studies for Oregon, Kansas and Massachusetts, a national model — the EBRI Retirement Security Projection Model® (RSPM) — was developed in 2003. By 2010 it has been updated to incorporate several significant changes, including the impacts of DB plan freezes, automatic enrollment provisions for 401(k) plans and the recent crises in the financial and housing markets. EBRI has recently updated the RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since Jan. 1, 2010 (based on a database of 23 million 401(k) participants). More information, as well as a chronology of the RSPM, is available here.] to evaluate a number of potential retirement preparation scenarios, taking into account varying levels of household income, debt, marital status, retirement plan participation, health, etc. Selected results from that analysis, published in Money’s March issue (see “Dream Big, Act Now: Six Secrets of Retirement”) showed the impact that various factors could have on the chances of running short of money in retirement.
Real as those factors are, many of life’s circumstances are completely beyond our control. However, some of the most important factors — including the decision to participate in a workplace retirement plan, or the amount we choose to save — are not.
For example, consider a 45-year-old female worker who is currently making $50,000 a year, with a current retirement savings balance of $50,000. Applying the RSPM model, [2. This application of the RSPM assumed stochastic returns with an average of 8.9% for stocks and 6.3% for bonds.] we find that if she contributes 1% of pay to her retirement savings each year, there is a 61% chance that she’ll run short of money in retirement. On the other hand, a 10% annual contribution rate (which could consist of her deferral plus an employer match) reduces that probability to 38%, while a 15% annual contribution rate reduces her risk to just 25%.
My flight home from the conference was never risk-free, even before Mother Nature decided to throw a wrench into my carefully designed itinerary. That said, having the potential problem highlighted early enough allowed me to take steps to avoid the worst of what surely would have been a very long and arduous flight home, arriving home two hours later than I had originally planned but well ahead of my likely arrival had I stayed on my original flights.
Much of today’s retirement planning tends to focus on things over which individual retirement savers (and the advisors who work with them) have no control — things like investment returns. Perhaps those looking for true retirement serenity might, like those who invoke the Serenity Prayer, be better advised to seek “the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference.”
Footnotes
