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I know some investors right now who are making major mistakes when it comes to retirement planning …
First, they have been consistently underestimating how much money they’ll need down the line. In essence they are pretending that inflation doesn’t exist …
Second, despite the major losses they actually experienced in their portfolios, they are acting as if those losses haven’t completely happened yet. Instead, they are basically just figuring that things will turn around if they wait long enough …
And interestingly enough, when these same investors were winning big a few years ago, they put off contributing more of their current earnings into their accounts … essentially letting their profits carry the day, or even borrowing money from their accounts!
Even today, with their balances way off what they should be, they are failing to contribute to their accounts. Some are even playing “shell games,” by moving money around to make it look like they’re in better shape than they really are.
All the while, they’re creeping ever closer to their final day of reckoning.
The scariest part: I’m not talking about careless individual investors, but rather the politicians and trustees running state pension plans … the collective retirements for hundreds of thousands of Americans!
State Pension Plans: Where Promises Meet Poor Planning
Solid retirement benefits have always been one of the big draws of getting a state government job.
After all, while state employees sometimes earn less than what they would receive in comparable private sector positions, they have continued to get guaranteed future retirement income even as major corporations have done away with their defined benefit pension plans.
But now, even state retirement funds are imploding, and promises are likely to get bent if not completely broken.
Consider Illinois. Joshua D. Rauh, a professor at Northwestern who analyzes pension funds, says the state’s plan could run out of money by 2018 … just eight years from now!
Oh, sure, the state is taking action: It recently raised the retirement age for workers to 67 and instituted a cap on the amount of a person’s salary that can be used to calculate benefits.
Illinois is already patting itself on the back, claiming that the cuts will save about $300 million in the first year alone.
However, the legislation only applies to newly hired workers. Everyone else — existing employees and retirees — are unaffected. So it could be decades before that change has any impact at all!
As a recent New York Times article pointed out:
“Despite its pension reform, Illinois is still in deep trouble. That vaunted $300 million in immediate savings? The state produced it by giving itself credit now for the much smaller checks it will send retirees many years in the future — people who must first be hired and then, for full benefits, work until age 67.
“By recognizing those far-off savings right away, Illinois is letting itself put less money into its pension fund now, starting with $300 million this year.
“That saves the state money, but it also weakens the pension fund, actually a family of funds, raising the risk of a collapse long before the real savings start to materialize.”
And this is just one example of states deluding themselves into believing they’re making progress because making real progress is either politically painful or legally impossible.
New Jersey is the perfect example. Professor Rauh estimates the state’s plan will go broke in 2019 — assuming it earns an 8 percent annual return going forward. And if it earns less, the plan may have just five years of solvency left.
Meanwhile, the state has only managed to reduce benefits for its future hires so far!
But how did it get to this point for so many states? Why are their plans so shaky in the first place?
Again, it boils down to sheer incompetence and a failure to balance reality with political jockeying. In other words, the very same thing that has bedeviled Social Security from day one!
New Jersey was underfunding its plan back in the 1990s … and instead of getting back in the saddle, the state decided to borrow money from elsewhere to make the plan look like it was solid. Their ultimate hope was that they would earn outsized gains on the borrowed money and all would be well.
Then, since things did go pretty well throughout the rest of the decade, they decided to INCREASE promised benefits in 2001!
I repeat: They did not plan for a rainy day. They did not pay off the loans. Like good politicians, they just kept spending money they didn’t have and kicked the can farther down the line.
And has anyone learned anything yet? Apparently not …
New York State has been looking to emulate New Jersey’s model by borrowing money from its plan.
The New York Times explained it this way:
“Under the plan, the state and municipalities would borrow the money to reduce their pension contributions for the next three years, in exchange for higher payments over the following decade. They would begin repaying what they borrowed, with interest, in 2013.
“But [Governor] Paterson and other state officials hope the stock market will have rebounded to such a degree by that time that the state’s overall pension contribution burden will have been reduced.
“Another oddity of the plan is that the pension fund, which assumes its assets will earn 8 percent a year, would accept interest payments from the state that would probably be 4.5 percent to 5.5 percent.”
File this one under “recipe for disaster,” as far as I’m concerned.
And it’s the same basic story from California to Pennsylvania, where my Dad currently has a state pension — governments are trying to rectify their promises with their poor planning … and failing miserably.
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| Gov. Schwarzenegger just “terminated” some state worker benefits in California … but he’s still got a long way to go. |
What will the final outcome be?
In many cases, already-retired workers may continue to receive the benefits they were promised, though future inflation adjustments could get canned. Existing workers will likely see some reductions in their promised benefits. And new state employees? Well, they’re going to end up on their own with 401(k)s like the rest of us.
And as far as I’m concerned, all that falls under “best case scenarios.”
If the state budgets don’t improve quickly — state taxpayers may be on the hook for promised benefits via tax hikes and/or reduced governmental services.
Ultimately, Washington may also find itself stuck with some rather large bailout requests.
Of course then we get back to the same old question: How is Washington going to bail anyone out when they can’t even balance their own budget and fund the retirement benefits that THEY promised?
I’ll Say It Again: Do NOT Count on Any
Government to Pay for Your Retirement!
In a perfect world, everyone would follow through on their promises. Lawmakers would run things with reason and restraint. They wouldn’t write checks their butts couldn’t cash.
But as the latest news from states around the U.S. demonstrates … we do not live in a perfect world. So you must have a backup plan of your own in place if you want to enjoy your retirement.
This is precisely what I’m telling my own father right now, and why I’m working so hard to help him reconfigure his personal nest egg.
And it’s why I want to help you do the same. Click here to learn how.
Best wishes,
Nilus
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