Last week the Senate passed a financial reform bill that, while the most sweeping since the Depression, failed to include amendments that would have held all financial advisors to a fiduciary standard. Apparently, Senators Menendez and Akaka, who support the fiduciary standard, could not garner enough support for their amendment. So, they pulled it, rather than allow it to be defeated.
All is not lost. The Senate and the House are currently assembling a team of lawmakers who will gather to reconcile differences in the Senate and House versions of financial reform legislation. Conference members may still include language modeled after the House bill which includes a fiduciary standard.
The Senate bill still includes a provision that requires the Securities and Exchange Commission to study the differences between the fiduciary standard and the suitability standard and make appropriate recommendations to Congress.
We do not need a federally funded study of this issue. Consumers deserve to be served by those who act in their best interests. It’s really that simple.
The banking, securities, and insurance industries are opposed to the implementation of a fiduciary standard. They are concerned that such a standard could impair their ability to conduct business, including selling proprietary products and charging commissions. They will lobby for the study and hope nothing comes of it.
Let’s hope our legislators defend consumers and pass a financial reform bill that includes the fiduciary standard.
Thursday, May 27, 2010
Friday, May 21, 2010
Americans Confront the Reality of Retirement
There were several reports this past week about American’s lack of preparation of preparation.
According to a study by Hewitt Associates, a global human resources consulting and outsourcing services company, employees will need 15.7 times their final pay when factoring in inflation and postretirement medical costs. Of the 15.7 times final pay, Hewitt estimates that Social Security will provide 4.7 of it, leaving employees responsible for making up the remaining 11 times final pay. This will likely have to come from company-provided plans and personal savings. But of the more than 2 million employees at 84 large U.S. companies it examined, Hewitt’s study found that only 18% of these people who are expected to work a full career will meet this goal.
TD Ameritrade released a survey indicates that 57% of Americans feel they are either a “little behind” or “far behind” in their planning for retirement. The majority (56%) indicated that they started saving for retirement later in life. The survey found that Americans are concerned about health care expenses, working longer than anticipated, outliving savings and managing their retirement savings.
There is an interesting parallel between what is currently happening in many European countries and the plight of many Americans. Greece, Spain, Portugal, and Italy (among other Euro countries) are dealing with the reality of excessive debt levels and government budget deficits. These countries can no longer finance their debts at sustainable levels. Further, they are no longer able to spend more than they take in. These countries are being forced to take austere measures to reduce debt, cut spending and balance their budgets.
Sounds remarkably similar to what many Americans are experiencing …
According to a study by Hewitt Associates, a global human resources consulting and outsourcing services company, employees will need 15.7 times their final pay when factoring in inflation and postretirement medical costs. Of the 15.7 times final pay, Hewitt estimates that Social Security will provide 4.7 of it, leaving employees responsible for making up the remaining 11 times final pay. This will likely have to come from company-provided plans and personal savings. But of the more than 2 million employees at 84 large U.S. companies it examined, Hewitt’s study found that only 18% of these people who are expected to work a full career will meet this goal.
TD Ameritrade released a survey indicates that 57% of Americans feel they are either a “little behind” or “far behind” in their planning for retirement. The majority (56%) indicated that they started saving for retirement later in life. The survey found that Americans are concerned about health care expenses, working longer than anticipated, outliving savings and managing their retirement savings.
There is an interesting parallel between what is currently happening in many European countries and the plight of many Americans. Greece, Spain, Portugal, and Italy (among other Euro countries) are dealing with the reality of excessive debt levels and government budget deficits. These countries can no longer finance their debts at sustainable levels. Further, they are no longer able to spend more than they take in. These countries are being forced to take austere measures to reduce debt, cut spending and balance their budgets.
Sounds remarkably similar to what many Americans are experiencing …
Thursday, May 13, 2010
Funding Retirement
The greatest threat to those who are retired is not death. It is running out of money. While no one looks forward to dying, without sounding insensitive, it is relatively inexpensive to die. There are final expenses which may include hospitalization, hospice care, a funeral or memorial, and burial or cremation. But these expenses are typically less than $10,000 for most people.
The much greater costs are those of living over a long period of time. Consider a person just now entering retirement who needs $4,000 a month to live comfortably.
Let’s imagine that Social Security provides $1,500 a month. That leaves $2,500 which must come from a pension or withdrawals from retirement savings.
How much money must a person have in savings to be able to draw $2,500 a month for the rest of her life? The rule of thumb in the financial planning community is that a sustainable rate of withdrawal is 3-6%. This will allow the retiree to maintain her purchasing power against the erosion of inflation and never run out of money.
So, if we assume a 4% withdrawal rate and a $2,500 monthly income need, our retiree will need $750,000 in retirement savings. This is significantly more than most Boomers have set aside currently for retirement. In fact, over half of that generation has less than $50,000 in savings.
Clearly, people need to save more. The question is, will they?
The much greater costs are those of living over a long period of time. Consider a person just now entering retirement who needs $4,000 a month to live comfortably.
Let’s imagine that Social Security provides $1,500 a month. That leaves $2,500 which must come from a pension or withdrawals from retirement savings.
How much money must a person have in savings to be able to draw $2,500 a month for the rest of her life? The rule of thumb in the financial planning community is that a sustainable rate of withdrawal is 3-6%. This will allow the retiree to maintain her purchasing power against the erosion of inflation and never run out of money.
So, if we assume a 4% withdrawal rate and a $2,500 monthly income need, our retiree will need $750,000 in retirement savings. This is significantly more than most Boomers have set aside currently for retirement. In fact, over half of that generation has less than $50,000 in savings.
Clearly, people need to save more. The question is, will they?
Friday, May 7, 2010
Wants vs. Needs
Recent economic data from the Commerce Department indicates that consumers are beginning to spend again as we emerge from the longest recession since the Depression. Consumer spending accounts for 70% of the demand in our economy. So, the 0.6% increase in consumer spending in March might be cause for celebration.
Wages, as measured by the Labor Department’s employment cost index, rose 0.2% from February’s level. But personal income rose by just 0.3% in March.
What does this mean? Consumers are likely reaching into their wallets for their credit cards in order to pay for purchases. In fact, the personal savings rate fell from 3% to 2.7%, the lowest level since September 2008.
So, once again consumers appear to be spending beyond their means. We know this is not sustainable and we know how this story ends.
Perhaps we need to remind ourselves of the difference between a “need” and a “want.” A need is something that we need to exist. Food, water, clothing, and shelter all come to mind. A want is something that … well, we want. We want new cars, a Hawaiian vacation, a new HD TV … Do we need these things? Clearly we do not.
There is nothing wrong with buying things we want, unless this impairs our ability to save for the future. If we don’t save for the future, we will be hard pressed to pay for our needs, much less our wants.
Wages, as measured by the Labor Department’s employment cost index, rose 0.2% from February’s level. But personal income rose by just 0.3% in March.
What does this mean? Consumers are likely reaching into their wallets for their credit cards in order to pay for purchases. In fact, the personal savings rate fell from 3% to 2.7%, the lowest level since September 2008.
So, once again consumers appear to be spending beyond their means. We know this is not sustainable and we know how this story ends.
Perhaps we need to remind ourselves of the difference between a “need” and a “want.” A need is something that we need to exist. Food, water, clothing, and shelter all come to mind. A want is something that … well, we want. We want new cars, a Hawaiian vacation, a new HD TV … Do we need these things? Clearly we do not.
There is nothing wrong with buying things we want, unless this impairs our ability to save for the future. If we don’t save for the future, we will be hard pressed to pay for our needs, much less our wants.
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