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Monday, December 14, 2009

Where Have All the Pensions Gone?

I have used my soap box to try and encourage modest living and saving for practical reasons as well as for a higher purpose. In particular, I've stressed the importance of saving for retirement and starting to save for retirement as soon as possible. Just days ago I took issue with a letter from the Rockland County Tomche Shabbos which basically said forget the IRA, there are more pressing needs.

Shortly after I wrote that post and the comments starting coming in, it hit me that there may be an honest disconnect in regards to retirement savings, which I think we should refer to as older age savings*.

Recently we ended up engaged in a conversation with some older family members regarding retirement. Despite their struggles in retirement, some issues which I will detail in a later post regarding the costs of retirement, they didn't seem to understand why so many young people are focused on their retirement accounts. The zinger came when one of them said "but what about your pension?" Uh, pension. What pension?

I have to wonder how many people out there, especially people who are running the opposition campaign and stating/implying that retirement savings are a luxury (see tuition vs. retirement) honestly believe that those saving for retirement are just "hoarding" money because they simply are living in a previous era.

Perhaps there are a good number of people in our communities who are simply unaware that the rules of retirement have changed that that today penions are a rarity and funding those IRAs, 401(k)s, and 403(b)s is how an employee funds a "pension"? Perhaps there are a good number of people who are unaware that social security isn't what it used to be (to say nothing of the fact that anyone with income beyond social security will be handing a good chunk of it right back to Uncle Sam and one's state of residence)? Perhaps there are a good number of people who honestly believe that if the parents don't have money, the kids will be able to step it and take over?

If there are people who just don't understand the level of self-sufficiency that is expected of the younger generation, I'd say that re-education is needed. More notes re: retirement later.


*Retirement seems to conjure up images of doing nothing all day long and cruising around the Caribean. All lovely things, but perhaps not things that have great value in the frum community (given that our first "real vacation"--a vacation that doesn't involve crashing with friends of family, might come post-retirement, I'm not going to knock cruising). Older age is something that happens and often comes with a large price tag.


Ariella said...

The only way to escape old age is to die young. Given the choice, growing old looks like the positive option one should plan for/

Anonymous said...

Cost of living calculators in retirement need to be adjusted for expected changes in lifestyle. The good news is that a frum couple that earns 120K/year with 4 children, who spend
--25K annualy on mortgage (excluding property taxes)
--25K annually on tuition and summer camp
--10K annually on clothing and food for the kids
--pay 15K a year on income taxes
--put aside 5K a year in retirement/college tuition,

Can survive on their same living standard earning 40K/year. If 20K comes from SS, they only need 300-400K in retirment funds to manage.

JLan said...

"Can survive on their same living standard earning 40K/year. If 20K comes from SS, they only need 300-400K in retirment funds to manage."


That's a bit low. Conventional thinking goes to 4% per year, with a cost of living increase, for 30 years (for all 30 year periods that have ended, that works for all except certain periods in 1929 and a few 1966-69). 20k would imply a need for 500k in retirement accounts.

UAG said...

Does anyone pay only 25k for 4 kids for yeshiva tuition and summer camp?

Anonymous said...

SL: I think you have hit on a good point about the generational shift and lack of pensions. IRAs,401k's and similar plans have only become common within the past 20 years.
However, even in the good old days, I wonder how many orthodox worked in government or for companies that had pensions. So many orthodox were self-employed or worked for shuls and schools that probably did not have pension plans.

Anonymous said...

Anonymous 11:39: I think your calculations may be off for the additional reason that you are assuming no income tax. That money in 401(K)'s, IRA's, etc. is fully taxable when you withdraw it. If the mony is in a bank account/cd, bonds, etc, you will still be paying on the interest. Also, don't forget about real estate and home owners insurance if your hypothetical couple owns a home and plans to stay.

Anonymous said...

If there are thse misimpressions among some sectors as to pensions and retirement savings, then some of that misinformation, or a failure to educate young people of the importance of starting to save for retirement with your first regular job as an adult, may be creating future problems for those now in their teens, 20s and beyond. I was in that generation when pensions were starting to disappear, but there was no discussion of retirement saving, 401k's etc. since they were new and the previous generation relied on pensions. As a result, we started our savings a decade too late. Losing 10 years of even modest savings that could have compounded for 30+ years makes catching up hard. There are many who are losing many more years than that before starting to save for retirement. Are teens and twenty somethings now getting that education? If they were, they might be happy to forego the more expensive weddings and furniture and prefer to put some of that aside for the future, and they might realize how those expenses are going to hurt their parents unless they are from fairly wealthy families .

gavra@work said...

I would call it my "personal kollel fund", collected so that I can afford to retire & learn (if I so desire) vs. having to work forever.

Orthonomics said...

In response to the second comment I will just mention that you are sorely mistaken regarding what older people can live on. In short, the clothing and food your kids are eating can easily be exchanged for increased medical care and a changing diet. Let's know even talk about the fact that lack of dependents increases the tax equation and that long term care insurance isn't cheap.

Michael said...

How can young people be expected to put away money for later when the local yeshivahs suck me dry for any and all extra income?

LeahGG said...

time to make aliya. We still have pensions in most job packages.

and high school tuition is $5000/year for boarding school.

Elementary school runs less than half that. And health insurance... affordable and good.

I can't understand how anyone could possibly live in the US at this point.

tesyaa said...

Leah, there are so many difficulties involved with making aliya. Such as not having a parnasa that is transferable to Israel.

In many of the American families I know who have made aliya, the husband is still working 2-3 weeks per month in the US or Europe. Not so conducive to family life.

And you are lucky that your parents live in Israel, but many of us can't leave our not-so-young parents.

Not to mention high schoolers and middle schoolers tend to have lots of difficulties adjusting to life in Israel.

I'm not saying it's not a wonderful goal, but it might not solve all of a family's problems.

LeahGG said...

tesyaa: I think that financially, a lot of people who think they couldn't make it here probably could - maybe not with 2 minivans and a big house, but still living nicely.

as for the other issues, true, not everyone can make aliya, family issues do play a role. I'm just getting on my soapbox a bit because I don't think aliya gets enough airtime as a possible path here.

ProfK said...

Like SL did let me say that commenter #2's figures are way off. Those who hit retirement age are not put into a box and stuck up on a shelf in an unheated storage shed somewhere. They have all the same expenses associated with home ownership that they had before retirement--gas, electricity, phones, Internet connection etc.. They need food and clothing and all the sundry items that constitute living. Their insurance plans cost more, and yes you had better have supplemental insurance because our government programs for seniors don't cover anywhere near all expenses. Their families do not disappear and there are still expenses for getting together and for gifts and all those "minor" expenses associated with being grandparents and great grandparents. There are taxes to be paid. And these expenses may be only the tip of the iceberg. Talk about $1 million in savings and you might be closer to the mark.

Anonymous said...

SephardiLady has correctly pointed out what is an enormous problem in society today (and not just among frum people): the lack of adequate retirement savings. What might affect the frum crowd more than the general population is the bizarro-land advice as seen in tuition vs. retirement.

Let me point out what is practically agreed upon financial wisdom: save for retirement first. You can borrow for other things, but you can't borrow for retirement. For those folks who say that after they pay their mortgage, tuition, etc. they have no money left for retirement, I would recommend to put retirement at the top of the list and then see what you can come up with for tuition. If a school says we can't give you financial aid because you have a retirement account, maybe you should turn the tables and ask if they'll make sure you aren't eating cat food in retirement. My guess is that for most readers here its not a question of "hoarding" money.

The conventional financial wisdom is that in retirement you'll probably need AT LEAST 70% of your income. If social security covers maybe 20-25% of your income, you'll still need to make up a big piece on your own.

Anonymous said...

Anonynous 10:50 - you are entirely correct. However, the schools don't exist to feed you in your retirement years. They need money to pay teachers, the building, supplies, etc. The question is if the schools can't operate by ignoring retirement funds when calculating aid, then what does a family do when faced with the choice of public school and having some funds for retirement or day school and having a very lean and impoverished retirement. The fact that so many still spend vast amounts on simchas, wedding gifts, camp, living in expensive areas, etc. suggest that there is room to pare down and still support both schools and retirement savings, but there are going to be a host of families that will have to make tougher choices than not having the big wedding or summer camp.

Anonymous said...

Schools should come up with a uniform schedule as to how much in retirement accounts will be disregarded when considering financial aid, with the amount depending on the parents' age(s). For example - disregard 10K for a 25 year old, 20K for a 26 year old, etc.

tesyaa said...

Schools should come up with a uniform schedule as to how much in retirement accounts will be disregarded when considering financial aid, with the amount depending on the parents' age(s). For example - disregard 10K for a 25 year old, 20K for a 26 year old, etc.

Schools will take what they can get. Until there is a very low cost competitor, or until people are willing to put their kids in public school en masse, the schools are in the driver's seat.

Joseph said...

Agreed Tesyaa. The problem is that there the powers-that-be in Bergen County (and presumably in other MO communities as well) have a vested interest in ensuring that no low-cost competitor gets off the ground. Thus there is no easy answer for parents who pay full tuition (b\c they make just ebough where they can't qualify for scholarship) and who won't consider sending their kids to public school. It is an uphill battle for us and school administrators are NOT on our side on this issue nor do the local Rabbis really care that much (beyond giving occasional lip-service and asking us to pay even more tuition in the form of donations to NNJKIDS). Suggestions anyone???

Anonymous said...

10:50 AM back visiting.

To 11:27 AM: If an individual family is faced with the choice of retirement savings or expensive simchas, camps, etc. it should be a no brainer. The fact that this question comes up is really symptomatic of one of the greatest ills we have in society: the inability to delay gratification.

I'm a little surprised that no one has mentioned it so far, but the question of tuition vs. retirement isn't really an honest question. At most, you can put $16,500 in a 401k. If you were to skip the 401k contributions and keep the cash, you'd be taxed on the $16,500, so assume you pay 33% in taxes, you're left with about $11,000. So its not a question of saving $16,500 or paying that in tuition. Its a question of saving $16,500 or paying $11,000 in tuition. And $11,000 might not even cover one child. Sure $11,000 is a lot, but it's not like you can impoverish yourself by stuffing money into a 401k and then ask for financial aid.

To 11:47 AM. I've said the same concept for a while for the reason that people tend to live up or down to expectations. If there were somewhat uniform expectations of tuition contributions, such as a family with X income and Y kids should pay Z, you shouldn’t have people later coming and saying that they have an enormous mortgage and need financial aid. If people know that for their income range and family size there is an expected family contribution of Z, people should buy and budget around that. If unfortunate circumstances such as a death happen, give them a break. If you’re horribly irresponsible, that’s your own fault.

I recall in a post a couple of months back SephardiLady cited a discussion that some parents had with Rabbi Teitz in NJ. If I recall correctly, one parent asked what percentage of income is it reasonable to expect to pay in tuition. Rabbi Teitz said he understood where the question was coming from, but he replied that he couldn’t give an answer because it’s different for everyone. With all due respect, I think that’s a major cop out. People are trying to budget and save and live responsibly, and you can’t give an answer---not even a range? And if your answer is that every last cent should be paid on tuition after you’ve paid your mortgage and bought food, say so. I’ll at least respect your honesty.

Miami Al said...

And if the amount given is: 100% after mortgages, car payments, and taxes are paid, please don't be shocked that people buy the biggest house they can qualify for a mortgage on, lease the most expensive car someone will let them take off the lot, and somehow manage their career(s) so that the family seems to only earn enough to pay for their mortgage, leases, and tax bills... don't be shocked when their income is exceeding that figure for one spouse to decide "to be with the kids," etc. If you tax people at 100%, people will work less and take more leisure.

Anonymous said...

Leah GG: Hear, Hear. I think its unfortunate for large families with older kids, they do seem to be kind of stuck for the time being. However, aliyah should be encouraged for the younger families, just marrieds, or singles.
I think that practically every career is transferable to Israel, if one is willing to learn the language (or make mistakes) and culture.

Anonymous said...

Anonymous 4:09 -- even younger families may have responsibilities to parents/grandparents and other relatives here that preclude moving. Also, its not just a "willingness" to learn the language. Some people (I am one) simply can't learn another language in adulthood sufficient to be able to make a living in that language, no matter how hard they try. The optimal time for learning a language is when young.
Aliya is simply not the magic bullet for all.

Avi said...

@anonymous 4:09 -

"I think that practically every career is transferable to Israel, if one is willing to learn the language (or make mistakes) and culture."

I appreciate the sentiment - aliyah solves a lot of problems we discuss here on Orthonomics, in addition to being a mitzvah. However, I'm afraid your notion of career portability is simply wrong. Some careers do transfer. Some don't. I'm going to ignore the language/culture issue entirely: many careers simply do not transfer to Israel. At all.

Jobs built around the large U.S. consumer market don't exist in Israel (for example, many marketing jobs). Some people have transferable skill sets, but are tied to local markets and cannot be easily uprooted (examples include real estate and owners of retail businesses. Sure, they COULD move, but it wouldn't be a "transfer," it would be a "dismantle and rebuild from scratch"). Some skills transfer but the nexus of jobs for those skills - or the high end of those skills - is in a specific geographic location outside Israel (examples include NYC and London for finance, Boston for education, LA for entertainment). Sure, you could be a doctor anywhere, but you can only be a doctor at Johns Hopkins if you live in Baltimore or a MIT research fellow if you live in Boston.

Then there is the question of where the nexus of business relationships lies. If you're in VC or communications tech, you can transfer to Israel (or Silicon Valley) with no problem. But if you're in consumer packaged goods, or your job is to deal with NY media, or you are a DC lobbyist, making aliyah is either impossible or means spending 6 months a year in the U.S. That's not exactly making aliyah, now, is it?

tnspr569 said...

Avi - well said.