Thoughts on DCPs and a few issues to consider

I have an abiding and continuing interest in the subject of retirement—it stems from a basic concern and a long career with economic issues of a variety of forms within the island community, together with a lifelong curiosity concerning the source and application of money from any endeavor—be it within the private sector or government generated revenue and expenditures.

It’s an interest most economists share with, the result of which is that most of us are hopeless worriers, particularly when it come to that cancerous scourge—that ravenous vulture of savings and purchasing power—known as inflation.

I’m interested also in the welfare and continued well-being of the indigenous people of the Northern Marianas and have been for the better part of 35 years. It is within this spirit that I make the following observations as concern future government employees and the new “defined contribution plan” and some of the economic forces that influence all retirement programs.

I note from a recent article in a local paper where the services of two Massachusetts consulting firms will be awarded contracts, namely, Clark Consulting and the Wagner Law Group, tasked with making recommendations for the implementation of the government’s new “defined contribution plan,” a voluntary program that will require all participating government employees hired after Jan. 1 to plan for, and assume the responsibility for their own retirement. More on this subject later.

Economist and former member of President Nixon’s staff, Ben Stien, had an interesting televised discussion recently on the condition of retirement plans in the United States and, in particular, the so-called “defined contribution plans,” of the type soon to be implemented for new government employees entering service in 2007 and beyond. At one point in his presentation, Stein pointed out a little appreciated fact. In planning for retirement, a 30-year-old individual hoping to retire at age 65 with the same relative standard of living enjoyed at age 30 must start now to save somewhere between 30 to 35 percent (if not more) of his or her income in a contribution plan hopefully structured to achieve the living standard maintained prior to the “savings set-aside.” In other words, the individual must lower their present disposable income expenditures (their consumption) through the process of saving—of which the net result for many will require lowering their present standard of living to accommodate the lower disposable income available for discretionary purchases.

Still another website concerning this subject points out the major mistakes many people make when managing their individual retirement contribution plan and 401(k)s in particular. A few of the more salient points taken from the website indicated are:

– “For those who participate, many start too late, and when they do start, their rate of saving is too low. (According to the latest report from the Federal Reserve, the average family’s account balance in a 401(k) is only $29,000)”;

– “Half the people with 401(k)s cash them out when they change jobs, despite the tax penalties for doing so. They use the money for bills, or as a down payment for a house, a vacation, education expenses, etc., instead of rolling the money into an IRA or another 401(k). It means the money’s not there when they come to retirement”;

– “401(k) investors aren’t aware of the fees and costs charged by the managers of 401(k) plans (usually mutual fund firms). These fees and costs compound over time and eat up a huge chunk of the employee’s investment returns. John C. Bogle, founder of the Vanguard mutual fund firm, says that over several decades, this adds up to 80 percent of returns going to the system’s managers, only 20 percent to the investor”;

– “Diversify investments to spread the risk. Put portions of the money into stocks, bonds, money market funds. Within these categories there are additional choices to help further diversify, for example corporate bonds, government bonds, municipal bonds”;

– “Many employees spend their 401(k) money too quickly when they retire. If they run out before the end of their lives, they will be left with nothing but Social Security and any other savings they might have”;

– “What do experts say should be the combined employee/employer amount put into a 401(k) each year? Fifteen to 18 percent of salary, every year, for 30 years is the recommendation from most experts. Most advise having roughly 10 times annual pay accumulated in a 401(k)-style plan by retirement time”;

– “Today, most workers nearing retirement have two to three times annual pay saved up in retirement accounts. That amount will allow them to maintain their pre-retirement standard of living for about seven to eight years, at a time when life expectancy past retirement age is 17 years or more.”

Those interested in the above can read more on the subject at—http://finance.yahoo.com/columnist/archives/headlines/yourlife/2006/1

Imagine the planning effort and money involved for a 20-year-old entering government service or the private sector in 2007 who expects to work and retire at age 65 or by the year 2052—a point in the future as distant as the year 1962 is in the past. Wow!
[I][B] To be continued[/B][/I]