
I usually err on the brighter side when talking about money management. Many articles are all doom and gloom and I don’t think that helps to motivate people – particularly those who know they’re in a bad position financially, but a straight talking professor of economics at the New School for Social Research, Teresa Ghilarducci, penned a scathing OpEd in The New York Times recently, and I can’t get it out of my head.
It was called “Our Ridiculous Approach to Retirement” and it outlines a number of confronting issues facing the collective American population. I like her use of the word “ridiculous” – as in “how the heck did we ever think this was a realistic or sustainable system?”
Here’s a quick list of Ghilarducci’s gripes:
- People are not successfully saving for retirement. Need evidence? Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day.
- Too many people rely on advice from “their guy” without fully understanding the nature of the relationship: whether their guy has a fiduciary loyalty to them as a client, or even how much he costs.
- It’s hard to know your number: how can you understand how much money you will need in retirement? How can you prepare for the unknown?
- It’s hard to know your date: many people will end up retiring earlier than anticipated because of family illness or because they are laid off. Working into old age is a privilege:
“The chance to work into one’s 70s primarily belongs to the most well off. Medical technology has helped extend life, by helping older people survive longer with illnesses and by helping others stay active. The gains in longevity in the last two decades almost all went to people earning more than average.”
In short – it’s really hard to plan ahead and it’s really hard to save. It’s crazy that we expect people to do these things on their own.
Ghilarducci’s solution calls for mandated retirement accounts for all: “These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities.”
Betterment’s plan is to create products that help people tackle the issue [note the two are not mutually exclusive]. We agree that majority of the products out there expect too much of people – too much knowledge, too much time, too much trust, and too much reliance on rational behavior.
Financial products shouldn’t expect individuals to make decisions like institutions (the knowledge and access is not the same), financial products should be time efficient – most people have full time jobs already, why expect them to take on a second managing their money? Financial products should be transparent in fees and practices, and they should automate good behavior.
We do a lot of this already. We think we can do a lot more. As we develop enhanced advice in our product we’ll be thinking about how to help people answer the all-important question: “am I okay?”. Because, really, that’s what it’s all about.
I see a bit of conflict between Ghilarducci’s second gripe and his solution.
“People don’t understand their investments / rely on others”
“Force to have accounts that they’re not allowed to manage / have to pay someone to mismanage.”
Irony much?
Also, what planet is he living on where he thinks he can get a guaranteed rate of return, that I assume would beat inflation? Here’s a graph:
http://advisoranalyst.com/glablog/wp-content/uploads/2010/09/093010_1959_TheMyopicBo2.png
Great article. I think we generally make excuses for ourselves because we are admittedly irrational beings. I wish there could be a better balance between understanding our immaturity and putting systems (automation and mandated retirement accounts) into place to deal with that, while countering or irrational behavior by helping to prepare young adults to take control of their finances. It seems like a better approach, unfortunately it might as well be rocket science.
Ghilarducci’s solution calls for mandated retirement accounts for all: “These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities.”
What’s Social Security and how’s that working out?
I have to agree with EV. Required contributions and annual payout (aka annuities)…is Social Security. How would another, possibly competing plan, help those that are not already taking responsibility for their own retirement. SSN was supposed to be only one leg of a 3-pillar retirement net (individual savings and company pensions/401(k) being the other two).
I disagree that it is either hard to know your number or your date. It might be impossible to know the exact number and date, but with some help it is possible to use worksheets, averages, and mortality tables to make some very good estimates. One need not be an actuary, but this is where advice and face-to-face service can really help. I don’t know how Betterment can overcome this challenge, but I hope you do.
In reply to ‘hbonwit’ question about which planet can provide a guaranteed rate of return that beats inflation? One option is on Earth. Several current Variable Annuities with living benefits can provide up 5% annual (minimum) return which exceed the last 30 year inflation rate by over 1.5%. These are not your parents’ annuities with no cash value, no redemption etc.
Overall, another great article Johanna! I think Betterment does a very good job with at least the first two concerns: not saving enough or understanding the costs. Keep up the good work.